Need help with exercise 5-7 pages 278/279 and BYP5-6 page 298/299. Image 1/2 are exercise 5-7 and image 3/4 is BYP5-6278 CHAPTER 5
Accounting for Merchandising Operations
Octagon’s cost of the additional merchandise sold to Stellar Stores was $5,720.
23 Octagon’s cost of the merchandise returned by Stellar was $176. As the merchandise was damaged, it
was put in the recycling bin.
(a) Prepare Octagon Wholesalers’ journal entries to record the sale transactions with Stellar. Remember to record
the freight and cash receipt transactions as appropriate,
(b) Calculate Octagon’s net sales, cost of goods sold, and gross profit for these sales.
Record purchase and sales
system. (SO 1,2,3) AP
E5-4 The following transactions occurred in April and May. Both companies use a perpetual inventory
Apr. 5
Olaf Company purchased merchandise from DeVito Company for $12,000, terms 2/10, n/30, FOB
shipping point. DeVito had paid $8,500 for the merchandise.
The correct company paid freight costs of $300.
Olaf Company returned damaged merchandise to DeVito Company and was given a purchase allowance
of $1,800. DeVito determined the merchandise could not be repaired and sent it to the recyclers. The
merchandise had cost DeVito $1,275.
Olaf paid the amount due to DeVito Company in full.
May 4
(a) Prepare the journal entries to record the above transactions for Olaf Company
(b) Prepare the journal entries to record the above transactions for DeVito Company
(c) Calculate the gross profit earned by DeVito on these transactions.
Record purchase and sales
system. (SO 1, 2, 3) AP
E5-5 The following merchandise transactions occurred in December. Both companies use a perpetual inventory
Dec. 3 Pippen Company sold merchandise to Thomas Co. for $32,000, terms 2/10, n/30, FOB destination. This
merchandise cost Pippen Company $18,000.
The correct company paid freight charges of $650.
Thomas Co. returned unwanted merchandise to Pippen. The returned merchandise had a sales price of
$1,800 and a cost of $990. It was restored to inventory.
13 Pippen Company received the balance due from Thomas Co.
(a) Prepare the journal entries to record these transactions on the books of Pippen Company.
(b) Prepare the journal entries to record these transactions on the books of Thomas Co.
(c) Calculate the gross profit earned by Pippen on the above transactions
Record inventory transactions E5-6 The following transactions occurred in June and July. Pele Company uses a perpetual inventory system.
and closing entries-
June 10
perpetual system
Pele Company purchased $4,000 of merchandise from Duvall Company, terms 2/10, n/30, FOB
shipping point.
(SO 2, 3, 4) AP
The correct company paid $375 of freight costs to Hoyt Movers
Damaged goods totalling $200 were returned to Duvall for credit.
20 Pele paid Duvall Company in full.
July 15 Pele sold all of the remaining merchandise purchased from Duvall for $9,275 cash.
Pele paid $350 of freight costs to AAA Transit to deliver the goods to the customer.
Pele gave its customer a $500 cash sales allowance for damaged goods. Pele uses a perpetual inventory
(a) Record each of the above transactions on the books of Pele Company.
(b) Prepare closing entries on July 31 for the temporary accounts.
E5-7 Delta Furniture Supply sells various furniture items and uses a perpetual inventory system on November 1
it had no tables in stock. The following transactions occurred during November:
Calculate cost of goods
available for sale, ending
inventory, cost of goods sold,
net sales, and gross profit.
Record adjusting entries-
perpetual system
(SO 1, 2, 3, 4) AP
Nov. 3
Delta purchased 150 tables from Burnaby Manufacturing Ltd. for $13,500, terms n/30, FOB shipping point.
Delta paid $450 to Freight Forward Company for the delivery of the tables.
19 Delta sold 45 tables to Hobby Horse Inc. for $170 each on credit, terms 2/10,n/30, FOB destination.
19 Delta paid $135 cash to Freight Forward Company for the delivery of the tables to Hobby Horse Inc.
Hobby Horse Inc. returned five tables. Delta credited Hobby Horse’s account and the tables were
returned to inventory
29 Delta received the amount owing from Hobby Horse Inc.
30 Paid Burnaby Manufacturing Ltd. for the tables purchased on November 3.
On November 30, Delta did an inventory count and found that there were 109 tables on hand.
(a) Calculate the total cost of the tables purchased during the month and the average cost per table.
(b) Calculate the number of tables that the company should have on hand according to its subsidiary ledger and
determine if an adjustment is required. If so, prepare the adjusting journal entry. Calculate the correct dollar
amount for the tables in the subsidiary ledger after any required adjustments.
(c) Calculate cost of goods sold after recording any required adjustments.
(d) Calculate the net sales and gross profit that Delta earned on its tables during November.
Calculate missing amounts
(SO 5) AP
E5-8 Financial information follows for three different companies:
Natural Cosmetics
Sales returns and allowances
Net sales
Cost of goods sold
Gross profit
Operating expenses
Profit from operations
Other expenses
Determine the missing amounts.
Mattar Grocery
$ (e)
SE Footware
Prepare single-step and
multiple-step income
statements, closing entries,
and post-closing trial
balance-perpetual system.
(SO 4,5) AP
Rent revenue
E5-9 The following is information from Lefebvre Company’s adjusted trial balance at December 31, 2014:
$ 75,700
Notes receivable
Merchandise inventory
Accumulated depreciation–equipment
$ 135,000
Unearned revenue
Notes payable
C. Lefebvre, capital
C. Lefebvre, drawings
Interest revenue
Advertising expense
Cost of goods sold
Depreciation expense
Freight out
Insurance expense
Interest expense
Salaries expense
Sales discounts
Sales returns and allowances
$2,567,000 $2,567,000
(a) Prepare a single-step income statement
(b) Prepare a multiple-step income statement
(c) Prepare closing entries and a post-closing trial balance.
Accounting for Merchandising Operations
Communication Activity
BYP5-4 Consider the following events listed in chronological order:
1. Dexter Maersk decides to buy a custom-made snowboard. He calls Great Canadian Snowboards and asks it to
manufacture one for him.
2. ‘The company e-mails Dexter a purchase order to fill out, which he immediately completes, signs, and sends
back with the required 25% down payment.
3. Great Canadian Snowboards receives Dexter’s purchase order and down payment, and begins working on the
4. Great Canadian Snowboards has its fiscal year end. At this time, Dexter’s board is 75% completed.
5. The company completes the snowboard for Dexter and notifies him.
6. Dexter picks up his snowboard from the company and takes it home.
7. Dexter tries the snowboard out and likes it so much that he carves his initials in it.
8. Great Canadian Snowboards bills Dexter for the cost of the snowboard, less the 25% down payment.
9. The company receives partial payment (another 25%) from Dexter.
10. The company receives payment of the balance due from Dexter
In a memo to the president of Great Canadian Snowboards, answer these questions:
(a) When should Great Canadian Snowboards record the revenue and cost of goods sold related to the snow-
board? Refer to the revenue and expense recognition criteria in your answer.
(b) Suppose that, with his purchase order, Dexter
was required to pay for 100% of the board. Would that change
your answer to part (a)?
Ethics Case
BYP5-5 Rita Pelzer was just hired as the assistant controller of Liu Stores. The company is a specialty chain store
with nine retail stores concentrated in one metropolitan area. Among other things, the payment of all invoices is
centralized in one of the departments Rita will manage. Her main responsibilities are to maintain the company’s
high credit rating by paying all bills when they are due and to take advantage of all cash discounts.
Jamie Caterino, the former assistant controller, who has now been promoted to controller, is training Rita in
her new duties. He instructs Rita to continue the practice of preparing all cheques for the amount due less the
discount and to date the cheques the last day of the discount period. “But,” Jamie continues, “we always hold the
cheques at least four days beyond the discount period before mailing them. That way we get another four days of
interest on our money. Most of our creditors need our business and don’t complain. And, if they scream about our
missing the discount period, we blame it on Canada Post. I think everybody does it. By the way, welcome
(a) What are the ethical considerations in this case?
(b) Which stakeholders are harmed or benefited?
(c) Should Rita continue the practice started by Jamie? Does she have any choice?
“All About You” Activity
BYP5-6 In the “All About You” feature, you learned about inventory theft and a relatively new technology to
help prevent theft. You have recently accepted a part-time sales position at a clothing store called College Fashions.
The owner-manager of the store knows that you are enrolled in a business program and seeks your advice on
preventing inventory shrinkage due to theft. The owner-manager is aware that the industry average shrinkage rates
are 1.49% of revenues but does not know College Fashions’ shrinkage rate.
(a) Assume the store uses a perpetual inventory system. Explain to the owner-manager how she can determine the
amount of inventory shrinkage.
(b) The owner-manager wants to know if she should implement some type of technology to prevent theft. What
would you advise her to consider before making an expenditure on technology to prevent theft?
(c) Assume that College Fashions’ sales revenues are $400,000 and the shrinkage rate is 4%. What is the dollar
amount that College Fashions loses due to shrinkage?
(d) Some believe that great customer service is the best defence against shoplifting. Discuss why great customer
service may help prevent shoplifting,
Answers to Chapter Questions
(e) You also learned in the All About You feature that employee inventory theft is a significant problem. What
procedures might management implement to prevent or reduce employee theft of inventory?
(f) In your part-time sales position, you have observed a fellow employee that you are friendly with provide
unauthorized sales discounts to her friends when they purchase merchandise from the store. Is it appropriate
for this employee to give her friend unauthorized sales discounts? Explain. What might be a consequence for
you as an employee if you fail to inform management of these unauthorized sales discounts?
Business Insight, p. 246
Q: What accounting information would help a manager decide what to do with returned goods?
A: The manager would need to know the potential revenues and expenses for each alternative. For example,
returning goods to stock and selling them again may provide the highest revenue but the cost of getting the
goods ready for resale may also be high. The revenue earned from liquidating the returned goods may be
much lower but the cost of doing this may also be very low. The manager should compare the estimated
profit–not just the revenue earned of each alternative when deciding what to do.
All About You Insight, p. 249
Q: Are there advantages to you as a customer when retailers increase theft prevention measures?
A: Many customers see theft prevention measures, such as locked fitting rooms, or having a store employee track
the items they are taking into a fitting room, as a very annoying personal inconvenience. But there are benefits
to the customers as well
as the stores. Retailers have to be able to pass all of their costs on to customers in order
to remain in business. When inventory theft increases, the selling price will also have to increase or the store
will not be profitable. If customers are not willing to pay the increased prices, then the store may have to go out
of business, resulting in less choice for consumers and fewer jobs. Inconveniences in using the fitting rooms
may be a far smaller price to pay than the alternatives.
1.b 2.d 3. a 4. a 5.b 6.c 7. a 8.c 9.d 10.c *11.a *12.b
Remember to go
back to the beginning
of the chapter to
check off your
completed work!
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