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Chapter 5 - Accounting for Merchandise Operation
Theoretical Part
1. What is Merchandise Inventory? Merchandise Inventory is Goods that a company owns and expects to sell to customers; also called merchandise or inventory. 2. Operating Cycle for a Merchandiser The cycle moves from (a) cash purchases of merchandise to (b) inventory for sale to (c) credit sales to (d) accounts receivable to (e) receipt of cash. The length of an operating cycle differs across the types of businesses. Department stores often have operating cycles of two to five months. Operating cycles for grocery stores are usually from two to eight weeks. Companies try to keep their operating cycles short because assets tied up in inventory and receivables are not productive. Cash sales shorten operating cycles. 3. Inventory Systems A. Perpetual Inventory System records the cost of goods sold at the time of each sale. B. Periodic Inventory System records the cost of goods sold at the end of the period.
Practical Part:
**1) Reporting Income for a Merchandiser
- Reporting Inventory for a Merchandiser** A merchandiser's balance sheet has a current asset called merchandise inventory, an item not on a service company's balance sheet. Merchandise inventory, or simply inventory, refers to products that a company owns and intends to sell. Inventory cost includes the cost to buy the goods, ship them to the store, and make them ready for sale. **3) Reporting Income for a Service Company
- Single- step Income Statement**
Nonoperating activities: Consist of expenses, revenues, losses, and gains that are unrelated to a company's main operations. 6) Merchandise Purchases & Sale using a perpetual system.
Credit Terms The amount of time allowed before full payment is due is the credit period. Sellers can grant a cash discount to encourage buyers to pay earlier. A buyer views a cash discount as a purchases discount. A seller views a cash discount as a sales discount. Any cash discounts are described on the invoice. The invoice date sets the discount and credit periods. 2/10, n/60 means full payment is due within a 60-day credit period, but the buyer can deduct 2% of the invoice amount if payment is made within 10 days of the invoice date. This reduced payment is only for the discount period. Purchases and Transportation Costs
Question 2:
Prepare journal entries to record the following merchandising transactions of Lowe’s, which
uses the perpetual inventory system. Hint: it will help to identify each receivable and
payable; for example, record the purchase on august 1 in Accounts payable – Aron.
Aug 1. Purchased merchandise from Aron Company for $7,500 under credit terms of 1/10,
n/30, FOB destination, invoice dated August 1.
Aug 5. Sold merchandise to Baird Corp. for 5,200 under credit terms of 2/10, n/60, FOB
destination, invoice dated August 5. The merchandise cost $4,
Aug 8. Purchased merchandise from Waters Corporation for $5,400 under credit terms of
1/10, n/45, FOB shipping point, invoice dated August 8.
Aug 9. Paid $125 for shipping charges related to the August 5 sale to Baird Corporation
Aug 10. Baird returned merchandise from the August 5 sale that had cost Lowe’s $400 and
was sold for $600. The merchandise was restored to inventory
Aug 12. After negotiations with Waters Corporations concerning problems with the
purchases on August 8. Lowe’s received a credit memorandum from Waters granting a price
reduction of $400 off the $5,400 of goods purchased.
Aug 14. At Aron’s request, Lowe’s paid $200 cash for freight charges on the August 1
purchase, reducing the amount owed to Aron
Aug 15. Received balance due from Baird Corp. for the August 5 sale less the return on
August 10
Aug 18. Paid the amount due to Water Corp. for the August 8 purchase less the price
allowance from August 12
Aug 19. Sold merchandise to Tux Co. for 4,800 under credit terms of n/10, FOB shipping
point, invoice dated August 19. The merchandise had a cost of $2,400.
Aug 22. Tux requested a price reduction on the August 19 sale because the merchandise did
not meet the specifications. Lowe’s sent Tux a $500 credit memorandum toward the $4,
invoice to resolve the issue.
Aug 29. Received Tux’s cash payment for the amount due from August 19 sale less the
price allowance from August 22.
Aug 30. Paid Aron Company the amount due from the August 1 purchase.
Answer: Date Entry Dr Cr Aug. 1 Merchandise Inventory Accounts Payable – Aron
Aug. 5 Accounts Receivable – Baird Sales revenue Cost of Goods Sold Merchandise Inventory
Aug. 8 Merchandise Inventory Accounts Payable – Waters
Aug. 9 Delivery expense Cash
Aug. 10 Sales Returns & Allowances Accounts Receivable - Baird Merchandise Inventory Cost of Goods Sold
Aug. 12 Accounts Payable Merchandise Inventory
Aug. 14 Accounts Payable – Aron Cash
Aug. 15 Cash*** Sales Discounts** Accounts Receivable – Baird* * 5,200 – 600 = $4, **($5,200 - $600) x 2% = $ 92 ***(4,600 – 92) = $ 4,
Aug. 18 Accounts Payable* Merchandise Inventory** Cash***
- 5,400 – 400 = $ **($5,400 - $400) x 1% = $ 50 ***($5,400 - $400) x (100% - 1%)= $4,
Aug. 19 Accounts Receivable – Tux Sales Revenue Cost of goods sold Merchandise Inventory
Aug. 22 Sales Returns & Allowances Accounts Receivable – Tux
Aug. 29 Cash Accounts Receivable – Tux *4,800 – 500 = $4,
Aug. 30 Accounts Payable – Aron Cash *7,500 – 200 = $7,
Question 5:
Wattan Company reports beginning inventory of 10 units at $60 each. Every week for four
weeks it purchases an additional 10 units at respective costs of $61, 562, $65, and 570 per
unit for weeks I through 4. Compute the cost of goods available for sale and the units
available for sale for this four-week period. Assume that no sales occur during those four
weeks.
Answer
Question 6:
Walberg Associates, antique dealers, purchased goods for $75,000. Terms of the purchase
were FOB shipping point, and the cost of transporting the goods to Walberg Associates's
warehouse was $2,400. Walberg. Associates insured the shipment at a cost of $300. Prior to
putting the goods up for sale, they cleaned and refurbished them at a cost of S980.
Determine the cost of inventory.
Answer: Cost of Inventory: Price ...........$75, Plus: Transportation in.......2, Insurance on shipment....... Cleaning & refurbishing..... Total cost of inventory...$78,
Answer:
Date Entry Debit
Dr
Credit
Cr
July 1 Merchandise Inventory
Accounts Payable - Boden
July 2 Accounts Receivable – Creek
Revenue
Cost of Goods Sold
Merchandise Inventory
July 3 Merchandise Inventory
Cash
July 8 Cash
Revenue
Cost of Goods Sold
Merchandise Inventory
July 9 Merchandise Inventory
Accounts Payable - Leight
July 11 Accounts Payable – Leight
Merchandise Inventory
July 12 Cash 900 –
Sales Discount
Accounts Receivable – Creek Full A.
July 16 Accounts Payable – Boden Full A.
Merchandise Inventory 6,000*1%
Cash 6,000 – 60
July 19 Accounts Receivable – Art
Revenue
Cost of Goods Sold
Merchandise Inventory
July 21 Sales Returns & Allowance
Accounts Receivable – Art
July 24 Accounts Payable – Leight Full A.
Merchandise Inventory 2,000*2%
Cash 2,000 - 40
July 30 Cash 1,100 - 22
Sales Discount 1,100*2%
Accounts Receivable – Art Full A.
July 31 Accounts Receivable – Creek
Revenue
Cost of Goods Sold
Merchandise Inventory
Question 8:
Prepare journal entries to record the following transactions for a retail store. The company
uses a
perpetual inventory system and the gross method.
Apr.2 Purchased $4,600 of merchandise from Lyon Company with credit terms of 2/15,
invoice dated April 2, and FOB shipping point.
Apr.3 Paid $300 cash for shipping charges on the April 2 purchase.
Apr.4 Returned to Lyon Company unacceptable merchandise that had an invoice price of
Apr.17 Sent a check to Lyon Company for the April 2 purchase, net of the discount and the
returned merchandise.
Apr.18 Purchased $8,500 of merchandise from Frist Corp. with credit terms of 1/10, 1/30,
invoice dated April 18, and FOB destination.
Apr.21 After negotiations over scuffed merchandise, received from Frist a $500 allowance
toward the $8,500 owed on the April 18 purchase.
Apr.28 Sent check to Frist paying for the April 18 purchase, net of the allowance and the
discount.
