CH-6 Accounting for Retailing – Accounting : Book Guide

Chapter 6: Accounting for Retailing Questions and solutions which have a GST version: • Exercise 6.1 • Exercise 6.2 • Exercise 6.3 • Exercise 6.4 • Exercise 6.5 • Exercise 6.7 • Problem 6.13 • Problem 6.14 • Problem 6.15 • Problem 6.16 • Problem 6.17 • Problem 6.18 • Problem 6.19 • Problem 6.20 • Problem 6.21 Discussion questions 1. Define the term 'inventory' as used in the accounting standard AASB 102/IAS 2 Inventories. Are office supplies included in inventory? Why or why not? The term 'inventory' is defined in AASB 102/IAS 2 as assets: (a) held for sale in the ordinary course of business; (b) in the process of production for such sale; or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services. For a retail organisation, inventory is the term which applies to goods or property purchased and held for sale in the ordinary course of business. Other assets held for future sale but not normally sold as part of the regular business activities, such as an item of used office equipment that is no longer needed, are not included in the inventory category. Office supplies also are not regarded as inventory, as such supplies are not held for sale in the ordinary course of business activities. 2. Discuss the purpose and content of source documents which are used by a business registered for GST to record the purchase and sale of inventory. How would your answer differ if the business was not GST-registered? For GST registered businesses, the same source documents are used as for a non-GST registered business, except that for GST registered businesses, registered business documents must conform to the requirements of the GST legislation, e.g. invoices must be labelled ‘Tax Invoice‘. If a business is not registered, its sales documents need not comply with GST Regulations. However, purchases documentation could differ if goods/services are purchased both from GST registered and non-GST registered businesses. In any accounting system, for the purchase of merchandise, the following documents are used: purchase requisition, purchase order, receiving report, delivery note, purchase invoice, adjustment (debit memo), cheques, credit card slips (if not using EFTPOS). [See also Chapter 7]. For the sale of merchandise, the entity will normally use the following documents: sales invoice, adjustment note (credit memo), cash docket, cheques received, credit card slips. In computerised systems, many of these documents are generated by the computer rather than by hand, thus speeding up the handling of such transactions. For all sales in excess of $50, a tax invoice must comply with the GST legislation. Requirements for tax invoices vary depending on whether the total amount payable on the invoices is $1000 or more. Requirements common to all tax invoices are: • the words ‘tax invoice’ stated prominently on the invoice • the ABN of the entity issuing the invoice • the date of issue of the invoice • the name of the supplier • a brief description of the items being supplied • if the invoice is for a taxable supply and either a GST-free or input taxed supply, the invoice must show each supply, the GST payable on each supply, and the total amount payable on the invoice as a whole. For tax invoices where the total payable is less than $1000, there is another requirement in addition to those above — where the GST payable is exactly 1/11 of the total price, either ‘the total price includes GST’ must appear on the invoice, or alternatively the GST amount on the supply can be shown separately. For tax invoices where the total payable is more than $1000, the requirements in addition to those above are: • the name of the recipient of the invoice • the ABN or the address of the recipient • the quantity of the goods or extent of the services being supplied. Where the total amount is exactly 1/11 of the total price, the invoice amount should show either a statement such as ‘the total price includes GST’ or the amount of GST. A tax invoice for a total amount less than $1000 is illustrated in figure 6.2 in the text (assuming a cash sale), and an invoice for a total amount of $1000 or more is illustrated in figure 6.3 in the text (assuming a credit sale with the offer of a cash settlement discount for prompt payment). 3. Discuss how gross profit on sales in calculated for a retail entity. Why are sales returns and allowances and purchase returns and allowances recorded in contra accounts to sales and purchases respectively? Why is freight inwards added to purchases but freight outwards treated as an expense? This question assumes the use of the periodic inventory system. To calculate gross profit on sales, subtract the cost of inventory sold from the dollar amount of net sales. The cost of inventory sold, or cost of sales, is determined, in monetary terms, as follows. • Beginning inventory for the period: - + Purchases - + Freight Inwards - – Purchases Returns and allowances - – Ending inventory for the period - Net sales equals sales revenue less sales returns and allowances. Under a periodic inventory system, sales returns and purchases returns are kept in separate contra accounts to provide better information as to the value, volume and proportion of sales which are returned from customers and purchases which are returned to suppliers. Under the periodic system, no detailed records are kept of inventory movements in or out, so recording these items in separate accounts at least provides some information on inventory movements for management use. Freight inwards is included in the cost of inventory because the cost of inventory, under the requirements of AASB 102/IAS 2, includes the invoice amount plus the costs incurred in the normal course of business in bringing inventories to their present location and condition. Freight outwards is regarded not as a cost of inventory but as a delivery expense resulting from a sale. 4. What is a cash discount? What are the benefits to the seller of allowing cash discounts? Distinguish between a cash discount and a trade discount. A ‘cash discount‘ or settlement discount is a percentage reduction on the invoice amount offered for payment of a credit sale within the discount period and is an incentive offered to the purchaser to pay for goods purchased early. The seller benefits by having the cash available earlier than the end of the normal credit period, and this can potentially reduce losses from bad debts. A 'trade discount' is a percentage reduction granted to a customer from the normal list price. In contrast to a cash discount, a trade discount is not related to early payment but is used in determining the actual invoice price to the customer. Trade discounts enable the business to print one price list but nevertheless vary prices in dealing with different customers. Trade discounts are not recorded in the accounts by either the buyer or the seller, and are disclosed as reductions in the list price on the sales invoice. 5. What is the meaning of the terms DPP and EXW? Discuss the impact of such terms on the buyer’s and seller’s accounting system. Provide an example to illustrate. EXW stands for ‘ex works’, and DDP stands for ‘delivered duty paid’. If goods are sold ‘EXW [named place of seller’s business]’, freight costs incurred from the point of shipment are paid by the buyer. If goods are sold ‘DDP [named place of destination]’, the seller bears all the costs of delivering the goods to the buyer. For example, ‘EXW Sydney warehouse’ means that the buyer pays freight costs from the supplier’s warehouse in Sydney; ‘DDP Brisbane head office’ means that the seller of the goods pays for the freight costs to the buyer’s head office in Brisbane. In the accounting cycle, if the terms of the sale are DDP and the freight cost is $450, the seller normally records the payment of freight costs as a debit to a Freight Outwards account for $450. Freight outwards is reported as a selling and distribution expense in the income statement. If the terms of the sale are EXW and the freight costs are $450, the buyer will normally record the freight costs in a Freight Inwards account for $450. This account is regarded as part of the cost of the purchase of inventory and is included in the calculation of cost of sales. 6. The perpetual inventory system is superior to the periodic system. Discuss. Advantages of the perpetual system over the periodic system. The perpetual system: • keeps a continuous record of all inventory movements so that, at any time, the entity knows how much inventory it should have on hand; • allows the entity to calculate cost of sales at the time of the sale; • allows better planning and control of the entity’s inventory requirements through the provision of more timely information; • is readily usable in computerised systems; • allows accurate assessment of inventory stolen or lost when inventory records are compared with stocktake figures. Disadvantages of the perpetual system compared with the periodic system. The perpetual system: • is more costly and more complicated to manage although this has become less significant with the use of computerised systems. • is unsuitable for small, inexpensive or immaterial items in that the cost of maintaining the perpetual records may exceed the benefits from having such detailed records. 7. With the growing importance of computerised accounting systems, which inventory system (perpetual or periodic) has become more popular? Explain why. Is this desirable. Why? The perpetual system is more popular in computerised systems because computers have allowed entities to gain better control over inventories by reducing the cost and time required to keep detailed inventory records. The availability of suitable computerised integrated accounting packages for inventory has improved the ability of entities to account for all movements of inventory. The use of optical-scan cash registers at checkouts to read product bar codes means that the cash register of today has become a computer terminal for entering inventory transactions into the accounting records at point of sale. 8. Why do businesses that use a perpetual inventory system continue to perform a physical stocktake at least once a year? The physical stocktake is used to verify the accuracy of the inventory records and determine the loss, if any, from theft, breakage and/or shrinkage. 9. Having examined the income statements for the last 2 years, the manager of a small business noticed that, in spite of the prosperous result for the current year, the income recognised as ‘discount received’ had fallen sharply from the previous year. Upon investigation, she found that the new employee appointed to look after payment of the accounts had not paid several invoices within the discount period, giving the reason that it was not worth the effort because the discount to be received was only 1% on some invoices, and 2% on others, if paid within 10 days. Discuss the importance (or otherwise) of paying creditors’ accounts within the discount period. The foregoing of cash discounts through late payment can become expensive for a business if due dates are consistently missed. For example, a creditor is owed $1000 on terms of 2/10, n/30, the entity, if it foregoes the 2% discount, is paying $20 for the privilege of waiting an additional 20 days before payment. This is equivalent to an annual interest rate of 36.5%! [2%  365 days/20 days]. If the cash discount is only 1%, the entity would pay $10 for the use of an additional 20 days credit. This is equivalent to an annual interest rate of 18.25%. Can a business afford to keep missing cash discounts when the effective interest rate for doing so is very high? One can also discuss the cash flow consequences, e.g. inability to pay on time because receivables are not paid on time. Meeting GST payments can also be relevant. 10. Describe the ratios that may be used by management to assess the profit performance of a retail business. Explain the factors which could contribute to adverse trends developing in these ratios. Ratios which may be used to assess profit performance include: •Gross profit ratio: Gross profit / Net sales  100% - The gross profit ratio expresses the gross profit return for every dollar of net sales. This ratio will decrease as the cost of sales increases in proportion to net sales. Therefore the gross profit margin declines when the cost of sales grows at a greater rate than net sales. •Profit margin: Profit (after tax) / Net sales  100% - The profit margin ratio describes what is returned as profit for every dollar of net sales. This ratio will decrease if expenses and the cost of sales increase at a greater rate in proportion to net sales. •Inventory turnover: Cost of sales/ Average inventory - This ratio indicates the number of times inventory has been sold or turned over in the period. The decline in the number of times the inventory is sold or turned over usually indicates lower profitability for a business. In other words the more times your inventory is brought in and completely sold during the year the greater your profit. Another ratio that could be used is the Expenses to sales ratio, which is calculated as Expenses/Net Sales. Exercises Exercise 6.1 Journal entries for both buyer and seller — periodic inventory system Non- GST version (a) Prepare general journal entries to record the following transactions (i) for Elwood Ltd and (ii) for Balaclava Ltd. Both companies use a periodic inventory system. (Assume neither is registered for GST.) (b) Indicate how each relevant account balance should be reported in the financial statements of Elwood Ltd and Balaclava Ltd. (LO3) (a)(i) ELWOOD LTD April 3 Accounts Receivable $3 250.00 Sales Revenue $3 250.00 Sold merchandise to Balaclava Ltd 2/10, n/30 April 7 Sales Returns and Allowances 420.00 Accounts Receivable 420.00 Balaclava Ltd returned goods for credit. April 8 Cash at Bank 2 773.40 Discount Allowed 56.60 Accounts Receivable 2 830.00 Received amount due from Balaclava Ltd. (a)(ii) BALACLAVA LTD April 3 Purchases $3 250.00 Accounts Payable 3 250.00 Purchased merchandise from Elwood Ltd. April 5 Freight Inwards 120.00 Cash at Bank 120.00 Paid freight on purchase from Elwood Ltd. April 7 Accounts Payable 420.00 Purchase Returns and Allowances 420.00 Returned goods to Elwood Ltd for credit. April 8 Accounts Payable 2 830.00 Discount Received 56.60 Cash 2 773.40 Paid amount due to Soft Ltd. (b) ELWOOD LTD Accounts Receivable – Current Asset – Balance Sheet/statement of financial position. Sales Revenue – Revenue – Income statement. Sales Returns & Allowances – Contra account to Revenue – Income statement. Cash at Bank – Current Asset – Balance sheet/statement of financial position. Discount Allowed – Deduction from Sales (or contra-revenue account) – Income Statement. BALACLAVA LTD Purchases – Cost of Sales – Income statement. Accounts Payable – Current Liability – Balance sheet/statement of financial position. Freight In – Cost of Sales – Income statement. Purchases Returns & Allowances – Contra to Purchases/Cost of Sales – Income statement. Cash at Bank – Current Asset – Balance sheet/statement of financial position. Discount Received – Contra to Purchases (or Cost of Sales) – Income statement. Exercise 6.1 Journal entries for both buyer and seller — periodic inventory system GST version (a) Prepare general journal entries to record the following transactions (i) for Elwood Ltd and (ii) for Balaclava Ltd. Both companies use a periodic inventory system. Assume both are registered for GST. April 3 5 7 8 Elwood Ltd sold merchandise to Balaclava Ltd for $3250 plus GST with terms 2/10, n/30, EXW supplier’s warehouse. Balaclava Ltd paid the freight cost of $120 plus GST. Balaclava Ltd returned merchandise worth $420 plus GST. Balaclava Ltd paid Elwood Ltd the amount due. (b) Indicate how each relevant account balance should be reported in the financial statements of Elwood Ltd and Balaclava Ltd. (LO3) (a)(i) ELWOOD LTD April 3 Accounts Receivable $3 575.00 GST Payable $325 Sales Revenue $3 250.00 Sold merchandise to Balaclava Ltd 2/10, n/30 April 7 Sales Returns and Allowances 420.00 GST Payable 42 Accounts Receivable 462.00 Balaclava Ltd returned goods for credit. April 8 Cash at Bank 3 050.74 Discount Allowed 56.60 GST Payable 5.66 Accounts Receivable 3 113.00 Received amount due from Balaclava Ltd. (a)(ii) BALACLAVA LTD April 3 Purchases $3 250.00 GST Receivable 325 Accounts Payable 3 575.00 Purchased merchandise from Elwood Ltd. April 5 Freight Inwards 120.00 GST Receivable 12.00 Cash at Bank 132.00 Paid freight on purchase from Elwood Ltd. April 7 Accounts Payable 462.00 GST Receivable 42.00 Purchase Returns and Allowances 420.00 Returned goods to Elwood Ltd for credit. April 8 Accounts Payable 3 113.00 GST Receivable 5.66 Discount Received 56.60 Cash 3 050.74 Paid amount due to Soft Ltd. (b) ELWOOD LTD Accounts Receivable – Current Asset – Balance Sheet/statement of financial position. GST Payable – Current Liability – Balance sheet/statement of financial position. Sales Revenue – Revenue – Income statement. Sales Returns & Allowances – Contra account to Revenue – Income statement. Cash at Bank – Current Asset – Balance sheet/statement of financial position. Discount Allowed – Deduction from Sales (or contra-revenue account) – Income Statement. BALACLAVA LTD Purchases – Cost of Sales – Income statement. GST Receivable – Current Asset – Balance sheet/ statement of financial position. Accounts Payable – Current Liability – Balance sheet/statement of financial position. Freight In – Cost of Sales – Income statement. Purchases Returns & Allowances – Contra to Purchases/Cost of Sales – Income statement. Cash at Bank – Current Asset – Balance sheet/statement of financial position. Discount Received – Contra to Purchases (or Cost of Sales) – Income statement. Exercise 6.2 Journal entries — perpetual inventory system Non-GST version Using the perpetual inventory system, record the following transactions in the general journal of Fitzroy Ltd (assume GST does not apply): 1. Purchased 240 units for $220 each on credit. 2. Returned 12 units to the supplier. 3. Sold 48 units for $380 each on credit. 4. Purchased office supplies for $360 cash. 5. Customer returned 6 of the units sold in (3). 6. Sold 42 units for $390 each on credit. 7. The physical inventory count at the end of the period consisted of 140 units of inventory. (LO3 and LO4) 1. Inventory 52 800 Accounts Payable 52 800 Purchase of inventory on credit. 2. Accounts Payable 2 640 Inventory 2 640 Return of 12 units of merchandise 3. Accounts Receivable (48  $380) 18 240 Sales 18 240 Sales on credit. Cost of Sales (48  $220) 10 560 Inventory 10 560 Cost of inventory sold. 4. Office Supplies 360 Cash at Bank 360 Purchase of office supplies. 5. Sales Returns and Allowances (6  $380) 2 280 Accounts Receivable 2 280 Return of 5 units from customer. Inventory (6  $220) 1 320 Cost of Sales 1 320 Returned merchandise put back into inventory. 6. Accounts Receivable (42  $390) 16 380 Sales 16 380 Sales on credit. Cost of Sales (42  $220) 9 240 Inventory 9 240 Cost of inventory sold. 7. Inventory Shortage Expense (4  $220) 880 Inventory 880 Missing units of inventory. Exercise 6.2 GST version Journal entries — perpetual inventory system Using the perpetual inventory system, record the following transactions in the general journal of Fitzroy Ltd, assuming the business is registered for GST and that GST has to be added to the figures given. 1. Purchased 240 units for $220 each on credit. 2. Returned 12 units to the supplier. 3. Sold 48 units for $380 each on credit. 4. Purchased office supplies for $360 cash. 5. Customer returned 6 of the units sold in (3). 6. Sold 42 units for $390 each on credit. 7. The physical inventory count at the end of the period consisted of 140 units of inventory. (LO3 and LO4) 1. Inventory (240  $220) 52 800 GST Receivable (240  $22) 5 280 Accounts Payable(240  $242) 58 080 Purchase of inventory on credit. 2. Accounts Payable (12  $242) 2 904 Inventory (12  $220) 2 640 GST Receivable (12  $22) 264 Return of merchandise 3. Accounts Receivable (48  $418) 20 064 Sales (48  $380) 18 240 GST Payable (48  $38) 1 824 Sales on credit. Cost of Sales (48  $220) 10 560 Inventory 10 560 Cost of inventory sold. 4. Office Supplies 360 GST Receivable 36 Cash at Bank 396 Purchase of office supplies. 5. Sales Returns and Allowances (6  $380) 2 280 GST Payable (6  $38) 228 Accounts Receivable (6  $418) 2 508 Return of merchandise from customer. Inventory (6  $220) 1 320 Cost of Sales 1 320 Returned merchandise put back into inventory. 6. Accounts Receivable (42  $429) 18 018 Sales (42  $390) 16 380 GST Payable (42  $39) 1 638 Sales on credit. Cost of Sales (42  $220) 9 240 Inventory 9 240 Cost of sales. 7. Inventory Shortage Expense (4  $220) 880 Inventory 880 Missing units of inventory. Exercise 6.3 Journal entries — periodic inventory system Non-GST version Using the periodic inventory system, prepare general journal entries for the following transactions of Heidelberg Housewares (assume no GST). 1. Purchased inventory on credit for $58 200. 2. Sold inventory for $18 800 in cash and $16 730 on credit. 3. A customer returned goods she had bought on credit for $1840. 4. Purchased a computer to be used in the business for $2400 cash. 5. Returned inventory for credit that was previously purchased for $1060. 6. Purchased inventory on credit with $12 800 list price. A 25% trade discount applies. 7. Sold inventory for $7600 on credit. (LO3 and LO4) 1. Purchases 58 200 Accounts Payable 58 200 Purchases of inventory on credit. 2. Cash at Bank 18 800 Accounts Receivable 16 730 Sales 35 530 Cash and credit sales. 3. Sales Returns and Allowances 1 840 Accounts Receivable 1 840 Return of merchandise from customer. 4. Office Equipment 2 400 Cash at Bank 2 400 Purchase of office computer. 5. Accounts Payable 1 060 Purchases Returns and Allowances 1 060 Merchandise returned from customer. 6. Purchases ($12 800  75%) 9 600 Accounts Payable 9 600 Merchandise purchased at a trade discount. 7. Accounts Receivable 7 600 Sales 7 600 Credit sales. Exercise 6.3 Journal entries — periodic inventory system GST version Using the periodic inventory system, prepare general journal entries for the following transactions of Heidelberg Housewares, assuming the business is registered for the GST and that GST has to be added to the figures given. 1. Purchased inventory on credit for $58 200. 2. Sold inventory for $18 800 in cash and $16 730 on credit. 3. A customer returned goods she had bought on credit for $1840. 4. Purchased a computer to be used in the business for $2400 cash. 5. Returned inventory for credit that was previously purchased for $1060. 6. Purchased inventory on credit with $12 800 list price. A 25% trade discount applies. 7. Sold inventory for $7600 on credit. (LO3 and LO4) 1. Purchases 58 200 GST Receivable 5 820 Accounts Payable 64 020 Credit purchases of inventory. 2. Cash at Bank 20 680 Accounts Receivable 18 403 Sales 35 530 GST Payable 3 553 Cash and credit sales. 3. Sales Returns and Allowances 1 840 GST Payable 184 Accounts Receivable 2 024 Return of merchandise from customer. 4. Office Equipment 2 400 GST Receivable 240 Cash at Bank 2 640 Purchase of office computer. 5. Accounts Payable 1 166 Purchases Returns and Allowances 1 060 GST Receivable 106 Merchandise returned from customer. 6. Purchases ($12 800  75%) 9 600 GST Receivable 960 Accounts Payable 10 560 Merchandise purchased at a trade discount. 7. Accounts Receivable 8 360 Sales 7 600 GST Payable 760 Credit sales. Exercise 6.4 Journal entries for buyer and seller — perpetual inventory system Non-GST version The following are selected transactions of Watsonia Stores: Required (a) Assuming that neither business is registered for GST, record the above transactions in the general journal of (1) Watsonia Stores and (2) Viewbank Market. (LO3 and LO4) (a)(1) WATSONIA STORES July 12 Accounts Receivable 1 200 Sales Revenue 1 200 Sold merchandise to Viewbank Market, 2/10, n/30. Cost of Sales 800 Inventory 800 Cost of inventory sold 19 Sales Returns and Allowances 90 Accounts Receivable 90 Viewbank Market returned goods for credit. Inventory 60 Cost of Sales 60 Goods returned placed back into inventory 21 Cash at Bank 1 087.80 Discount Allowed 22.20 Accounts Receivable 1 110 Received amount due from Viewbank Market. (a)(2) VIEWBANK MARKET July 12 Inventory 1 200 Accounts Payable 1 200 Purchased merchandise from Watsonia Stores. 19 Accounts Payable 90 Inventory 90 Returned goods to Watsonia Stores for credit. 21 Accounts Payable 1 110 Discount Received 22.20 Cash 1 087.80 Paid amount due to Watsonia Stores. Exercise 6.4 Journal entries — perpetual inventory system GST version Refer to the information in exercise 6.4 and assume now that both businesses are registered for GST. Required (a) Record the transactions in the general journal of (1) Watsonia Stores and (2) Viewbank Market. (LO3 and LO4) (a)(1) WATSONIA STORES July 12 Accounts Receivable 1 320 Sales Revenue 1 200 GST Payable 120 Sold merchandise to Viewbank Market, 2/10, n/30. Cost of Sales 800 Inventory 800 Cost of inventory sold 19 Sales Returns and Allowances 90 GST Payable 9 Accounts Receivable 99 Viewbank Market returned goods for credit. Inventory 60 Cost of Sales 60 Goods returned placed back into inventory 21 Cash at Bank 1 196.58 Discount Allowed 22.20 GST Payable 2.22 Accounts Receivable 1 221 Received amount due from Now Discounters. (a)(2) VIEWBANK MARKET July 12 Inventory 1 200 GST Receivable 120 Accounts Payable 1 320 Purchased merchandise from Watsonia Stores. 19 Accounts Payable 99 GST Receivable 9 Inventory 90 Returned goods to Watsonia Stores for credit. 21 Accounts Payable 1 221 Discount Received 22.20 GST Receivable 2.22 Cash 1 196.58 Paid amount due to Watsonia Stores. Exercise 6.5 Discounts and returns Non-GST version Chloe’s Clothing Importers sells clothing with credit terms of 3/15, n/30. A trade discount of 30% is given to purchases made by wholesalers. On 6 September 2019, Kingsbury Wholesalers purchased clothing with a list price of $176 000 from Chloe’s Clothing Importers. The clothes had cost the business $80 000 to import from Thailand. Ignore GST. Required (a) Determine the amount of the trade discount given to Kingsbury Wholesalers. (b) Assume that Kingsbury Wholesalers returned clothing with an original list price of $2640, and a cost of $1200. What source documents would be used by each business to note the transaction? Prepare journal entries to record the return in the accounting records of both entities. (c) What is the discount period? If Kingsbury Wholesalers pays on the last day of the discount period, how much is the sales discount recorded by Chloe’s Clothing Importers? (Don’t forget the return.) Record the journal entry made by both entities. (d) If Kingsbury Wholesalers does not pay within the discount period, when is the net amount due? What would be the effective annual interest rate assuming that Kingsbury Wholesalers pays on the day the net amount is due? (LO3 and LO4) (a) Trade discount 30% on $176 000 list price = $52 800. (b) Kingsbury Wholesalers would issue a Debit Note to Chloe’s Clothing Importers for the amount of $1848 [i.e. $2640 – 30%  $2 640] and Chloe’s Clothing Importers would forward a Credit Note to Kingsbury Wholesalers. Sales Return ( in records of Chloe’s Clothing Importers) 7 April Sales Return and Allowances 1 848 Accounts Receivable 1 848 Sales return from Kingsbury Wholesalers. Inventory 1 200 Cost of Sales 1 200 Cost of goods returned Purchases Return ( in records of Kingsbury Wholesalers) 7 April Accounts Payable 1 848 Inventory 1 848 Purchase return to Chloe’s Clothing Importers. (c) The discount period is the length of time permitted for early payment to attract a discount, e.g. payment required within 15 days. Sale Price (adjusted) = $176 000 (list price) minus $52 800 (trade discount) minus $1 848 (sales return) = $121 352 Sales Discount = 3%  $121 352 = $3 640.56 Payment ( in records of Chloe’s Clothing Importers) Cash at Bank 117711.44 Discount Allowed 3640.56 Accounts Receivable 121352 Received amount due from Kingsbury Wholesalers Payment ( in records of Kingsbury Wholesalers) Accounts Payable 121352 Discount Received 3640.56 Cash 117711.44 Paid amount due to Watsonia Stores. (d) Failing to make payments within the discount period attracts an effective interest rate of: = $3 640.56/121352  365/15  100% = 73% Exercise 6.5 Discounts and returns GST version Chloe’s Clothing Importers sells clothing with credit terms of 3/15, n/30. A trade discount of 30% is given to purchases made by wholesalers. On 6 September 2019, Kingsbury Wholesalers purchased clothing with a list price of $176 000, plus GST, from Chloe’s Clothing Importers. The clothes had cost the business $80 000, plus GST, to import from Thailand. Required (a) Determine the amount of the trade discount given to Kingsbury Wholesalers. (b) Assume that Kingsbury Wholesalers returned clothing with an original list price of $2640 plus GST, and a cost of $1200. What source documents would be used by each business to note the transaction? Prepare journal entries to record the return in the accounting records of both entities. (c) What is the discount period? If Kingsbury Wholesalers pays on the last day of the discount period, how much is the sales discount recorded by Chloe’s Clothing Importers? (Don’t forget the return.) Record the journal entry made by both entities. (d) If Kingsbury Wholesalers does not pay within the discount period, when is the net amount due? What would be the effective annual interest rate assuming that Kingsbury Wholesalers pays on the day the net amount is due? (LO3 and LO4) (a) Trade discount 30% on $176 000 list price = $52 800. (b) Kingsbury Wholesalers would issue a Debit Note to Chloe’s Clothing Importers for the amount of $2032.80 [i.e. ($2640 – 30%  $2 640) x 1.1] and Chloe’s Clothing Importers would forward a Credit Note to Kingsbury Wholesalers. Sales Return ( in records of Chloe’s Clothing Importers) 7 April Sales Return and Allowances 1 848.00 GST Payable 184.80 Accounts Receivable 2 032.80 Sales return from Kingsbury Wholesalers. Inventory 1 200 Cost of Sales 1 200 Cost of goods returned Purchases Return ( in records of Kingsbury Wholesalers) 7 April Accounts Payable 2 032.80 GST Receivable 184.80 Inventory 1 848.00 Purchase return to Chloe’s Clothing Importers. (c) The discount period is the length of time permitted for early payment to attract a discount, e.g. payment required within 15 days. Sale Price (adjusted) = $176 000 (list price) minus $52 800 (trade discount) minus $1 848 (sales return) + GST = $121 352 + GST = $133 487.20 Sales Discount = 3%  $121 352 + GST = $3 640.56 + GST = $4 004.62 Payment ( in records of Chloe’s Clothing Importers) Cash at Bank 129 482.58 Discount Allowed 3 640.56 GST Payable 364.06 Accounts Receivable 133 487.20 Received amount due from Kingsbury Wholesalers Payment ( in records of Kingsbury Wholesalers) Accounts Payable 133 487.20 GST Receivable 364.06 Discount Received 3 640.56 Cash 128 482.58 Paid amount due to Watsonia Stores. (d) Failing to make payments within the discount period attracts an effective interest rate of: = $3 640.56/121352  365/15  100% = 73% Exercise 6.6 Journal entries — freight costs and discounts Non-GST version The Confiture Factory in central Adelaide buys sculptures, flat ware and jewellery from a number of private artists around the country. The Confiture Factory always purchases the products from the suppliers on the terms EXW (place of seller’s business) and usually sells to customers on the basis of cash over the counter. Assume the use of a periodic inventory system and ignore GST. The following events occurred in the first week of November 2020 for the Confiture Factory. Required (a) Record the transactions above in the general journal of the Confiture Factory. (LO3 and LO4) (a) General journal 2020 Nov. 9 Purchases 32 000 Accounts Payable 32 000 Accounts Payable 1 300 Purchase of glassware from Roger Podin, EXW Freight Inwards 480 Cash at Bank 480 Freight costs incurred 11 Cash at Bank 48 000 Sales 48 000 Sale to NSW Mining Ltd, terms DPP Sydney Freight Outwards 120 Cash at Bank 120 Freight costs on sale to NSW Mining Ltd 12 Cash at Bank 8 000 Sales 8 000 Cash sale to Fairfield Fine Fittings, terms EXW No freight costs incurred by the Confiture Factory 14 Accounts Payable 32 000 Cash at Bank 32 000 Payment of cash to supplier David Flute Exercise 6.6 Journal entries — freight costs and discounts GST version The Confiture Factory in central Adelaide buys sculptures, flat ware and jewellery from a number of private artists around the country. The Confiture Factory always purchases the products from the suppliers on the terms EXW (place of seller’s business) and usually sells to customers on the basis of cash over the counter. Assume the use of a periodic inventory system and GST has been added to all figures. The following events occurred in the first week of November 2020 for the Confiture Factory: Required (a) Record the transactions above in the general journal of the Confiture Factory. (LO3 and LO4) (a) General journal 2020 Nov. 9 Purchases 32 000 GST Receivable 3 200 Accounts Payable 35 200 Accounts Payable 1 300 Purchase of glassware from Roger Podin, EXW Freight Inwards 480 GST Receivable 48 Cash at Bank 528 Freight costs incurred 11 Cash at Bank 52 800 GST Payable 4 800 Sales 48 000 Sale to NSW Mining Ltd, terms DPP Sydney Freight Outwards 120 GST Receivable 12 Cash at Bank 132 Freight costs on sale to NSW Mining Ltd 12 Cash at Bank 8 800 GST Payable 800 Sales 8 000 Cash sale to Fairfield Fine Fittings, terms EXW No freight costs incurred by the Confiture Factory 14 Accounts Payable 35 200 Cash at Bank 35 200 Payment of cash to supplier David Flute Exercise 6.7 Income Statement — periodic inventory system Use the following information from the records of Preston Partners to prepare an income statement under the periodic inventory system for the year ended 30 June 2020. (LO2 and LO6) PRESTON PARTNERS Income Statement for the year ended 30 June 2020 INCOME Sales Revenue: $268 860 Less: Sales returns and allowances 6 220 Net sales revenue 262 640 Cost of sales: Beginning inventory $13 860 Purchases $186 600 Freight inwards 3 180 189 780 Less: Purchases returns and allowances 4 420 Cost of net purchases 185 360 Cost of goods available for sale 199 220 Less: Ending inventory 12 920 Cost of sales 186 300 GROSS PROFIT 76 340 EXPENSES: Selling and Distribution expenses 45 420 Administrative expenses 16 460 Finance and other expenses 2 020 63 900 PROFIT $12 440 Exercise 6.8 Income statement — perpetual inventory system The account balances below are taken from the records of Gilberton Retail Prepare an income statement under the perpetual inventory system for the year ended 30 June 2019. (LO2 and LO6) GILBERTON RETAIL Income Statement for the year ended 30 June 2019 INCOME Sales Revenue: $163 810 Less: Sales returns and allowances 3 880 Net sales revenue 159 930 Cost of sales ($102 620 + $2 020): 104 640 GROSS PROFIT 55 290 EXPENSES: Selling and distribution expenses $32 730 Administrative expenses 10 750 Finance expenses 1 360 44 840 PROFIT $10 450 Exercise 6.9 Completion of worksheet — periodic inventory system Selected accounts and a section of a worksheet for Sunhill Stores are shown below. Required (a) The beginning and ending inventory were $45 760 and $52 420 respectively. Enter the beginning and ending inventory amounts in the appropriate columns and extend the other account balances listed to their appropriate columns. (LO5) (a) SUNHILL STORES Worksheet Adjusted Trial Balance Income Statement Balance Sheet Account Debit Credit Debit Credit Debit Credit Inventory 45 760 45 760 52 420 52 420 Sales 335 400 335 400 Sales Returns & Allowances 6 500 6 500 Discount Allowed 4 910 4 910 Purchases 196 560 196 560 Purch. Returns & Allowances 3 280 3 280 Discount Received 2 610 2 610 Freight Inwards 1 960 1 960 Income Tax Expense 13 760 13 760 Current Tax Liability 13 760 13 760 Exercise 6.10 Closing entries — periodic inventory system The following information is taken from the trial balance of Petra’s Pedicure Parlour. Required (a) Given that the cost of the inventory on 30 June 2020 is $25 300, prepare the closing entries on 30 June 2020. (LO5) (a) June 30 Profit or Loss Summary 378 130 Inventory (1 July 2019) 24 290 Sales Returns & Allowances 4 520 Discount Allowed 1 820 Purchases 218 380 Freight Inwards 3 510 Selling and Distribution Expenses 69 060 Administrative Expenses 56 550 Close debit accounts to Profit or Loss Summary. Sales 360 520 Inventory (30 June 2020) 25 300 Purchases Returns and Allowances 1 580 Discount Received 1 390 Profit or Loss Summary 388 790 Close credit accounts to Profit or Loss Summary. Profit or Loss Summary 10 660 Petra Portillo, Capital 10 660 Profit transferred. Petra Portillo, Capital 20 600 Petra Portillo, Drawings 20 600 Close drawings to Capital A/c. Exercise 6.11 Closing entries — perpetual inventory system The trial balance of West meadow Weightlifting contains the following account balances at 30 June. Required (a) Prepare the closing entries under the perpetual inventory system. (LO5) (a) June 30 Profit or Loss Summary 2 273 921 Sales Returns & Allowances 43 740 Cost of Sales 1 528 960 Freight Inwards 27 480 Selling Expenses 388 150 Administrative Expenses 233 411 Discount Allowed 7 740 Finance Expenses 44 440 Close debit temporary accounts. Sales 2 389 720 Discount Received 5 360 Profit or Loss Summary 2 395 080 Close credit temporary accounts. Profit or Loss Summary 121 159 Walter Westmeadow, Capital 121 159 Transfer profit to capital. Walter Westmeadow, Capital 93 540 Walter Westmeadow, Drawings 93 540 Transfer drawings to Capital A/c. Exercise 6.12 Missing data and profitability analysis Summary financial information for two independent companies is presented below. Required (a) Calculate the missing amounts. (b) Calculate the gross profit ratio, profit margin and expenses to sales ratio for each company. (c) Compare and comment on the two companies’ ratios you calculated in requirement (b). (LO8) (a) and (b) Kalkallo Ltd Mickleham Ltd Sales $420 000 $528 000 Sales returns 24 000 18 000 Net sales 396 000 510 000 Cost of sales 230 000 345 000 Gross profit 166 000 165 000 Expenses 105 000 85 000 Profit 61 000 80 000 Gross Profit Ratio 41.9% 32.4% Profit Margin 15.4% 15.7% Expenses to Sales 26.5% 16.7% (c) Although Mickleham Ltd reported higher sales and net sales in absolute dollars, it also reported higher expenses (cost of sales and expenses) in absolute terms. This resulted in lower profitability ratios in gross profit and profit margin ratios calculated. Therefore, even though sales were higher, Mickleham Ltd did not operate as profitably as Kalkallo Ltd. Mickleham Ltd’s cost of sales was higher in absolute terms and proportionately to Kalkallo Ltd. These higher costs resulted in lower gross profit margin for Mickleham Ltd. Problems Problem 6.13 Journal entries — perpetual inventory system Non-GST version Schofield’s Stores carried out the following transactions relating to a single product in October. Required (a) Prepare general journal entries to record the transactions, assuming that a perpetual inventory system is used. The beginning inventory on 30 September consisted of 80 units at $60 cost each. Ignore GST. (b) Assuming that the business closes its records at the end of the month, prepare entries to close the Profit or Loss Summary accounts based on the data in requirement A, assuming that expenses for October were $2900. (LO3 and LO4) (a) SCHOFIELD’S STORES Oct. 5 Inventory (100  $60) 6 000 Accounts Payable 6 000 Purchased units on credit. Oct. 11 Accounts Payable (6  $60) 360 Inventory 360 Returned unsuitable units. Oct. 13 Accounts Receivable 10 080 Sales (112  $90) 10 080 Sold 112 units on credit. Cost of Sales (112  $60) 6 720 Inventory 6 720 Recorded cost of sales. Oct. 19 Sales Returns & Allowances (3  $90) 270 Accounts Receivable 270 Units returned by customers. Inventory (3  $60) 180 Cost of Sales 180 Units returned into inventory. Oct. 26 Accounts Receivable 3 150 Sales (35  $90) 3 150 Sold 35 units on credit. Cost of Sales 2 100 Inventory (35  $60) 2 100 Cost of the goods sold. (b) Closing entries Oct. 31 Profit or Loss Summary 11 810 Sales Returns & Allowances 270 Cost of Sales* 8 640 Expenses 2 900 Close debit accounts. *($6 720 – 180 + 2 100) Sales ($10 080 + $3 150) 13 230 Profit or Loss Summary 13 230 Close credit accounts. Profit or Loss Summary 1 420 Schofield, Capital 1 420 Transfer profit to capital account. Problem 6.13 Journal entries — perpetual inventory system GST version Schofield’s Stores carried out the following transactions relating to a single product in October. Required (a) Prepare general journal entries to record the transactions, assuming that a perpetual inventory system is used. The beginning inventory on 30 September consisted of 80 units at $60 cost each, assuming the business is registered for the GST. (b) Assuming that the business closes its records at the end of the month, prepare entries to close the Profit or Loss Summary accounts based on the data in requirement (a), assuming that expenses for October were $2900. (LO3 and LO4) (a) SCHOFIELD’S STORES Oct. 5 Inventory (100  $60) 6 000 GST Receivable 600 Accounts Payable (100  $66) 6 600 Purchased units on credit. Oct. 11 Accounts Payable (6  $66) 396 Inventory (6  $60) 360 GST Receivable 36 Returned unsuitable units. Oct. 13 Accounts Receivable (112  $99) 11 088 Sales (112  $90) 10 080 GST Payable 1 008 Sold 112 units on credit. Cost of Sales (112  $60) 6 720 Inventory 6 720 Recorded cost of the goods sold. Oct. 19 Sales Returns & Allowances 270 GST Payable 27 Accounts Receivable (3  $99) 297 Units returned by customers. Inventory (3  $60) 180 Cost of Sales 180 Units returned into inventory. Oct. 26 Accounts Receivable (35  $99) 3 465 Sales (35  $90) 3 150 GST Payable 315 Sold 35 units on credit. Cost of Sales 2 100 Inventory (35  $60) 2 100 Cost of sales. (b) Closing entries Oct. 31 Profit or Loss Summary 11 810 Sales Returns & Allowances 270 Cost of Sales* 8 640 Expenses 2 900 Close debit accounts. *($6 720 – 180 + 2 100) Sales ($10 080 + $3 150) 13 230 Profit or Loss Summary 13 230 Close credit accounts. Profit or Loss Summary 1 420 Schofield, Capital 1 420 Transfer profit to capital account. Problem 6.14 Journal entries for both buyer and seller — periodic inventory system Non-GST version The following transactions relate to the businesses of L. Lakemba and F. Fairlight. Both businesses use a periodic inventory system. Required (a) Prepare general journal entries to record the transactions, ignoring GST. (LO3 and LO4) (a) L. LAKEMBA June. 7 Accounts Receivable 3 400 Sales 3 400 Sold merchandise to F. Fairlight, 2/10, n/30 June 14 Cash at Bank 3 332 Discount Allowed 68 Accounts Receivable 3 400 Cash amount received from F. Fairlight. June 15 Accounts Receivable 2 470 Sales 2 470 Sold merchandise to F. Fairlight. June 26 Cash at Bank 2 470 Accounts Receivable 2 470 Cash amount received from F. Fairlight. F. FAIRLIGHT June 7 Purchases 3 400 Accounts Payable 3 400 Purchase from L. Lakemba, 2/10, n/30 June 14 Accounts Payable 3 400 Discount Received 68 Cash at Bank 3 332 Payment to L. Lakemba. June 15 Purchases 2 470 Accounts Payable 2 470 Purchase from L. Lakemba, 2/10, n/30. June 26 Accounts Payable 2 470 Cash at Bank 2 470 Payment to L. Lakemba. Problem 6.14 Journal entries for both buyer and seller — periodic inventory system GST version The following transactions relate to the businesses of L. Lakemba and F. Fairlight. Both businesses use a periodic inventory system. Required (a) Prepare general journal entries to record the transactions, assuming both businesses are registered for the GST. (LO3 and LO4) (a) L. LAKEMBA & F. FAIRLIGHT L. LAKEMBA June 7 Accounts Receivable 3 740 Sales 3 400 GST Payable 340 Sold merchandise to F. Fairlight, 2/10, n/30 June 14 Cash at Bank 3 665.20 Discount Allowed 68.00 GST Payable 6.80 Accounts Receivable 3 740 Cash amount received from F. Fairlight. June 15 Accounts Receivable 2 717 Sales 2 470 GST Payable 247 Sold merchandise to F. Fairlight. June 26 Cash at Bank 2 717 Accounts Receivable 2 717 Cash amount received from F. Fairlight. F. FAIRLIGHT June 7 Purchases 3 400 GST Receivable 340 Accounts Payable 3 740 Purchase from L. Lakemba, 2/10, n/30 June 14 Accounts Payable 3 740 Discount Received 68.00 GST Receivable 6.80 Cash at Bank 3 665.20 Payment to L. Lakemba. June 15 Purchases 2 470 GST Receivable 247 Accounts Payable 2 717 Purchase from L. Lakemba, 2/10, n/30. June 26 Accounts Payable 2 717 Cash at Bank 2 717 Payment to L. Lakemba. Problem 6.15 Journal entries — perpetual inventory system Non-GST version On 28 February 2019, Darwin-based entity, Phonee Partners, had inventory of 480 phones at a total cost of $153 600. The business maintains a perpetual inventory system. The following transactions occurred during March 2019. Phonee Partner’s chart of accounts contained the following accounts: Cash at Bank, Sales, Accounts Receivable, Discount Allowed, Inventory, Sales Returns and Allowances, Accounts Payable, Cost of Sales, Discount Received. Required (a) Prepare journal entries for the above transactions for the month of March 2019 for Phonee Partners. (LO3 and LO4) (a) PHONEE PARTNERS General journal 2019 Mar. 2 Inventory 78 400 Accounts Payable 78 400 Purchased 280 phones from Sutherland Electronics for $280 each. Mar. 5 Accounts Receivable 211 250 Sales 211 250 Sold 325 phones to Phone Phanatics for $650 each. Cost of Sales 91 000 Inventory 91 000 Cost of inventory sold Mar. 8 Accounts Payable 1 680 Inventory 1 680 Credit from Sutherland Electronics for damaged goods returned to it Mar. 11 Accounts Payable 76 720 Discount Received 1 534.40 Cash at Bank 75 185.60 Payment to Sutherland Electronics, less discount of 2%. Mar. 11 Cash at Bank 211 250 Accounts Receivable 211 250 Cash received from Phone Phanatics. Mar. 18 Accounts Receivable 37 200 Sales 37 200 Sale of 60 phones to Kingsford Phones Cost of Sales 16 800 Inventory 16 800 Cost of phones sold. Mar. 20 Inventory 22 400 Accounts Payable 22 400 Purchase of 80 phones from Oakhurst International. Mar. 24 Cash at Bank 36 456 Discount Allowed 744 Accounts Receivable 37 200 Cash received from Kingsford Phones. Mar. 26 Accounts Payable 22 400 Discount Received 448 Cash at Bank 21 952 Cash paid to Oakhurst International. Mar. 29 Accounts Receivable 63 700 Sales 63 700 Sales to Hinchinbrook Phone Shop Cost of Sales 27 440 Inventory 27 440 Coast of goods sold to Hinchinbrook Phone Shop Mar. 31 Sales Returns & Allowances 4 550 Accounts Receivable 4 550 7 phones returned by Hinchinbrook Phone Shop Inventory 1 960 Cost of Sales 1 960 Phones returned to inventory Problem 6.15 Journal entries — perpetual inventory system GST version On 28 February 2019, Darwin-based entity, Phonee Partners, had inventory of 480 phones at a total cost of $153 600. The business maintains a perpetual inventory system. The following transactions occurred during March 2019: Assume the business is registered for GST. Phonee Partner’s chart of accounts contained the following accounts: Cash at Bank, Sales, Accounts Receivable, Discount Allowed, Inventory, Sales Returns and Allowances, Accounts Payable, Cost of Sales, Discount Received, GST Payable, GST Receivable. Required (a) Prepare journal entries for the above transactions for the month of March 2019 for Phonee Partners. (LO3 and LO4) (a) PHONEE PARTNERS General Journal 2019 Mar. 2 Inventory 78 400 GST Receivable 7 840 Accounts Payable 86 240 Purchased 280 phones from Sutherland Electronics for $280 each. Mar. 5 Accounts Receivable 232 375 GST Payable 21 125 Sales 211 250 Sold 325 phones to Phone Phanatics for $650 each. Cost of Sales 91 000 Inventory 91 000 Cost of inventory sold Mar. 8 Accounts Payable 1 848 GST Receivable 168 Inventory 1 680 Credit from Sutherland Electronics for damaged goods returned to it Mar. 11 Accounts Payable 84 392 Discount Received 1 534.40 GST Receivable 153.44 Cash at Bank 82 704.16 Payment to Sutherland Electronics, less discount of 2%. Mar. 11 Cash at Bank 232 375 Accounts Receivable 232 375 Cash received from Phone Phanatics. Mar. 18 Accounts Receivable 40 920 GST Payable 3 720 Sales 37 200 Sale of 60 phones to Kingsford Phones Cost of Sales 16 800 Inventory 16 800 Cost of phones sold. Mar. 20 Inventory 22 400 GST Receivable 2 240 Accounts Payable 24 640 Purchase of 80 phones from Oakhurst International. Mar. 24 Cash at Bank 40 101.60 Discount Allowed 744.00 GST Payable 74.40 Accounts Receivable 40 920 Cash received from Kingsford Phones. Mar. 26 Accounts Payable 24 640 GST Receivable 44.80 Discount Received 448.00 Cash at Bank 24 147.20 Cash paid to Oakhurst International. Mar. 29 Accounts Receivable 70 070 GST Payable 6 370 Sales 63 700 Sales to Hinchinbrook Phone Shop Cost of Sales 27 440 Inventory 27 440 Coast of goods sold to Hinchinbrook Phone Shop Mar. 31 Sales Returns & Allowances 4 550 GST Payable 455 Accounts Receivable 5 005 7 phones returned by Hinchinbrook Phone Shop Inventory 1 960 Cost of Sales 1 960 Phones returned to inventory Problem 6.16 Journal entries — perpetual and periodic inventory systems Non-GST version Assume that Merryland’s Markets had an inventory balance of $32 570 at the close of the last accounting period. The following sales and purchase transactions are for the current period. 1. Purchased goods on account for $27 190. 2. Returned part of the above purchase that had an original purchase price of $1590. 3. Paid for the balance of the purchase in time to receive a discount of 2% of the purchase price. 4. Sold goods costing $24 900 for $49 820. Cash of $23 000 was received, with the balance due on account. 5. Goods sold on credit for $2023 (cost $1010) were returned. Required (a) In two columns, prepare general journal entries (ignoring GST) assuming: i. a periodic inventory system is used ii. a perpetual inventory system is used. (b) Suppose that a physical count of the inventory at the end of the current period shows inventory of $30 000 to be on hand. Present the entries (if any) required under each inventory system to adjust for any discrepancy. (c) Comment on which system would best disclose any discrepancy. (LO3 and LO4) (a) MERRYLAND’S MARKETS Periodic Perpetual 1. Purchases 27 190 Inventory 27 190 Accounts Payable 27 190 Accounts Payable 27 190 2. Accounts Payable 1 590 Accounts Payable 1 590 Purchases Returns & Allows. 1 590 Inventory 1 590 3. Accounts Payable 25600 0 Accounts Payable 25600 Discount Received 512 Discount Received 512 Cash at Bank 25 088 Cash at Bank 25 088 4. Cash 23 000 Cash 23 000 Accounts Receivable 26 820 Accounts Receivable 26 820 Sales 49 820 Sales 49 820 Cost of Sales 24 900 Inventory 24 900 5. Sales Returns & Allows 2 020 Sales Returns & Allows 2 020 Accounts Receivable 2 020 Accounts Receivable 2 020 Inventory 1 010 Cost of Sales 1 010 (b) Physical count at period end $30 000 Inventory balance Perpetual System $30 000 No entry required under periodic system. Inventory loss included in calculation of Cost of Sales. $32 570 (balance) + $27 190 (purchase) – $1 590 (return) – $24 900 (sale) + $1 010 (sale return) = $34 280 Inventory Shortage Expense 4 280 Inventory 4 280 Inventory loss $43 280 – $30 000 = $4280 (c) The perpetual inventory system is the only system which can identify inventory discrepancies. This system maintains an accurate record of how many inventory units should be on hand at any one time. The system can then identify any discrepancy between recorded inventory balances and the stocktake or physical count of inventory numbers. In this case the inventory shortage amount of $4280 is significant and the owner of the business needs to investigate the cause. Is it theft? Is the inventory being discarded because it has perished? Is it a combination of factors? What can be done about it? Problem 6.16 Journal entries — perpetual and periodic inventory systems GST version Assume that Merryland’s Markets had an inventory balance of $32 570 at the close of the last accounting period. The following sales and purchase transactions are for the current period. 1. Purchased goods on account for $27 190. 2. Returned part of the above purchase that had an original purchase price of $1590. 3. Paid for the balance of the purchase in time to receive a discount of 2% of the purchase price. 4. Sold goods costing $24 900 for $49 820. Cash of $23 000 was received, with the balance due on account. 5. Goods sold on credit for $2023 (cost $1010) were returned. Required (a) In two columns, prepare general journal entries assuming: i. a periodic inventory system is used ii. a perpetual inventory system is used. (b) Suppose that a physical count of the inventory at the end of the current period shows inventory of $30 000 to be on hand. Present the entries (if any) required under each inventory system to adjust for any discrepancy. (c) Comment on which system would best disclose any discrepancy. (LO3 and LO4) (a) MERRYLAND’S MARKETS Periodic Perpetual 1. Purchases 27 190 Inventory 27 190 GST Receivable 2 719 GST Receivable 2 719 Accounts Payable 29 909 Accounts Payable 29 909 2. Accounts Payable 1 749 Accounts Payable 1 749 Purchases Rtns & Allows. 1 590 Inventory 1 590 GST Receivable 159 GST Receivable 159 3. Accounts Payable 28 160 Accounts Payable 28 160 Discount Received 512.00 Discount Received 512.00 GST Receivable 51.20 GST Receivable 51.20 Cash at Bank 27 596.80 Cash at Bank 27 596.80 4. Cash 23 000 Cash 23 000 Accounts Receivable 31 802 Accounts Receivable 31 802 Sales 49 820 Sales 49 820 GST Payable 4 982 GST Payable 4 982 Cost of Sales 24 900 Inventory 24 900 5. Sales Returns & Allowances 2 020 Sales Rtns & Allows 2 020 GST Payable 202 GST Payable 202 Accounts Receivable 2 222 Accounts Receivable 2 222 Inventory 1 010 Cost of Sales 1 010 (b) Physical count at period end $30 000 Inventory balance Perpetual System $30 000 No entry required under periodic system. Inventory loss included in calculation of Cost of Sales. $32 570 (balance) + $27 190 (purchase) – $1 590 (return) – $24 900 (sale) + $1 010 (sale return) = $34 280 Inventory Shortage Expense 4 280 Inventory 4 280 Inventory loss $43 280 – $30 000 = $4280 (c) The perpetual inventory system is the only system which can identify inventory discrepancies. This system maintains an accurate record of how many inventory units should be on hand at any one time. The system can then identify any discrepancy between recorded inventory balances and the stocktake or physical count of inventory numbers. In this case the inventory shortage amount of $4280 is significant and the owner of the business needs to investigate the cause. Is it theft? Is the inventory being discarded because it has perished? Is it a combination of factors? What can be done about it? Problem 6.17 Journal entries, discounts, closing entries and income statements — both perpetual and periodic inventory systems Non-GST version Dundas Desks buys desks for $80 each and sells them for $140 each. On 1 August 2019, 86 desks were in inventory. Dundas Desks completed the transactions below during August. A physical inventory count taken on 31 August 2019 showed 63 desks in stock. Required (a) In two columns and ignoring GST, prepare general journal entries to record the transactions assuming: i. a perpetual inventory system is used ii. a periodic inventory system is used. Narrations are not required. (b) Assuming Dundas Desks closes its accounts at month end; prepare relevant entries to close the accounts under both inventory systems. (c) Prepare two separate income statements showing gross profit and profit for August, assuming that: i. the perpetual inventory system was used ii. the periodic inventory system was used. (LO3, LO4, LO5 and LO6) (a) DUNDAS DESKS Aug 1. Perpetual 2. Periodic 2. Inventory 11 200 Purchases 11 200 Accounts Payable 11 200 Accounts Payable 11 200 3. Freight Inwards 120 Freight Inwards 120 Cash at Bank 120 Cash at Bank 120 4. Accounts Receivable 11 200 Accounts Receivable 11 200 Sales 11 200 Sales 11 200 Cost of Sales 6 400 Inventory 6 400 Freight Outwards 60 Freight Outwards 60 Cash at Bank 60 Cash at Bank 60 8. Accounts Payable 2 400 Accounts Payable 2 400 Inventory 2 400 Purchases Returns & Allowances 2 400 Accounts Payable (110  $80) 8 800 Accounts Payable 8 800 Discount Received 176 Discount Received 176 Cash at Bank 8 624 Cash at Bank 8 624 Perpetual Periodic 10. Sales Returns & Allows. 1 540 Sales Returns & Allows. 1 540 Accounts Receivable 1 540 Accounts Receivable 1 540 Inventory 880 Cost of Sales 880 12. Inventory 5 760 Purchases 5 760 Accounts Payable 5 760 Accounts Payable 5 760 13. Cash at Bank 9 370.20 Cash at Bank 9 370.20 Discount Allowed 289.80 Discount Allowed 289.80 Accounts Receivable 9 660 Accounts Receivable 9 660 (69 desks  $140) 18. Cash at Bank 16 800 Cash at Bank 16 800 Sales 16 800 Sales 16 800 Cost of Sales 11 200 Inventory 11 200 20. Sales Returns & Allows. 720 Sales Returns & Allows. 720 Cash at Bank 720 Cash at Bank 720 Inventory 480 Cost of Sales 480 23. Accounts Payable 5 760 Accounts Payable 5 760 Cash at Bank 5 760 Cash at Bank 5 760 31 Stock Loss Expense 160 Inventory 160 Closing entries Aug. 1. Perpetual 2. Periodic 31. Profit or Loss Summary 19129.80 Profit or Loss Summary 26569.80 Sales Ret & Allows. 2 260 Inventory 6 880 Cost of Sales 16 240 Sales Ret & Allows. 2 260 Freight Inwards 120 Purchases 16 960 Freight Out 60 Freight Inwards 120 Discount Allowed 289.80 Freight Out 60 Stock Loss Expense 160 Discount Allowed 289.80 Sales 28 000 Sales 28 000 Discount Received 176 Purchases Ret & Allows. 2 400 Profit or Loss Summary 28 176 Inventory 5 040 Discount Received 176 Profit or Loss Summary 35 616 Profit or Loss Summary 9046.20 Profit or Loss Summary 9046.20 Capital 9046.20 Capital 9046.20 (c) Perpetual DUNDAS DESKS Income Statement for the month ended 31 August 2019 INCOME Sales revenue $28 000.00 Less: Sales returns and allowances $2 260.00 Discount allowed 289.80 2549.80 Net sales revenue 25450.20 Less: Cost of sales 16 360 Stock loss 160 Discount received (176) 16 344.00 GROSS PROFIT 9106.20 Less: Freight out 60.00 PROFIT 9046.20 Periodic DUNDAS DESKS Income Statement for the month ended 31August 2019 INCOME Sales revenue $28 000.00 Less: Sales returns and allowances $2 260.00 Discount allowed 289.80 2549.80 Net sales revenue 25450.20 Cost of sales: Beginning inventory $6 880 Add: Cost of purchases $16 960 Freight Inwards 120 17 080 Less: Purchases returns & allowances 2 400 Discount received 176 Net cost of purchases 14 504 Cost of goods available for sale 21 384 Less: Cost of ending inventory 5 040 Cost of sales 16 344 GROSS PROFIT 9106.20 Less: Freight out 60 PROFIT 9046.20 Problem 6.17 Journal entries, discounts, closing entries and income statements — both perpetual and periodic inventory systems GST version Dundas Desks buys desks for $80 each and sells them for $140 each. On 1 August 2019, 86 desks were in inventory. Dundas Desks completed the transactions below during August. A physical inventory count taken on 31 August 2019 showed 63 desks in stock. Required (a) In two columns and assume the business is registered for the GST, prepare general journal entries to record the transactions assuming: i. a perpetual inventory system is used ii. a periodic inventory system is used. Narrations are not required. (b) Assuming Dundas Desks closes its accounts at month end; prepare relevant entries to close the accounts under both inventory systems. (c) Prepare two separate income statements showing gross profit and profit for August, assuming that: i. the perpetual inventory system was used ii. the periodic inventory system was used. (LO3, LO4, LO5 and LO6) Problem 6.18 Journal entries involving discounts, closing entries, and income statement — perpetual inventory system Non-GST version Vaucluse Ltd sells handheld video consoles for $120 each. It buys the consoles for $90 each. On 1 June 2020, 60 consoles are in inventory. Vaucluse Ltd completed the following transactions during June (ignore GST). A physical inventory count taken on 30 June disclosed that 103 consoles were on hand. Required (a) Prepare general journal entries to record the transactions, assuming that a perpetual inventory system is used. Ignore GST. (b) Assuming that Vaucluse Ltd completes the closing process at the end of each month, prepare entries to close the accounts. (c) Prepare an income statement for the month of June 2020. (LO3, LO4 and LO6) (a) 2020 June 1 Cash at Bank 1 440 Sales 1 440 12 consoles sold for cash. Cost of Sales 1 080 Inventory 1 080 Cost of consoles sold. 2 Accounts Payable 2 160 Cash at Bank 2 160 Payment for consoles purchased on 6 May 4 Inventory 2 880 Accounts Payable 2 880 Purchase of consoles on credit 5 Sales Returns & Allowances 480 Cash at Bank 480 Refund for consoles returned. Inventory 360 Cost of Sales 360 Consoles returned to inventory. June 8 Freight Inwards 20 Cash at Bank 20 Freight on June 4 purchase. 10 Accounts Payable 270 Inventory 270 Returned 3 consoles purchased on 4 June. 12 Accounts Receivable 2 160 Sales 2 160 Sold 18 consoles on credit. Cost of Sales 1 620 Inventory 1 620 Cost of consoles sold. 14 Accounts Payable 2 610 Discount Received 52.20 Cash at Bank 2 557.80 (32 – 3 returned = 29) Paid for 4 June purchase. 23 Sales Returns & Allowances 360 Accounts Receivable 360 Consoles returned by customer. Inventory 270 Cost of Sales 270 Consoles returned put back into inventory. Cash at Bank 1 800 Accounts Receivable 1 800 Cash received from customer. 24 Inventory 3600 Accounts Payable 3600 40 consoles purchased on credit. June 29 Accounts Payable 3600 Discount Received 72 Cash at Bank 3528 Paid for 24 April purchase. Inventory shortage: Physical Count 103 consoles @ $90 Records show 106 consoles @ $90 should be on hand. Entry to record shortage 3 units @ $90. Inventory Shortage Expense 270 Inventory 270 Inventory short by 3 consoles. (b) Closing entries 30 Profit or Loss Summary 3 200 Sales Returns & Allows 840 Cost of Sales 2 070 Inventory shortage 270 Freight Inwards 20 Close debit temporary accounts Discount Received 72 Sales 3 600 Profit or Loss Summary 3672 Close credit temporary accounts Profit or Loss Summary 472 Retained Earnings 472 Transfer profit to retained earnings. (c) Perpetual VAUCLUSE LTD Income Statement for the month ended 30 June 2020 INCOME Sales Revenue $3 600 Less: Sales returns and allowances 840 Net sales revenue 2 760 Cost of sales 2 090 Less: Discount received 72 2 036 GROSS PROFIT 742 Less: Expenses Inventory shortage 270 PROFIT 472 Problem 6.18 Journal entries involving GST, discounts, closing entries, and income statement — perpetual inventory system GST version Vaucluse Ltd sells handheld video consoles for $120 each. It buys the consoles for $90 each. On 1 June 2020, 60 consoles are in inventory. Vaucluse Ltd completed the following transactions during June. Assume that Vaucluse Ltd is registered for GST. Assume that dollar figures quoted in problem 6.6 are ex GST. Hence, the selling price of consoles is now $132 including GST, the purchase price is now $99 including GST and the freight charge paid on 8 June is now $22 including GST. A physical inventory count taken on 30 June disclosed that 103 consoles were on hand. Required (a) Prepare general journal entries to record the transactions, assuming that a perpetual inventory system is used. Ignore GST. (b) Assuming that Vaucluse Ltd completes the closing process at the end of each month, prepare entries to close the accounts. (c) Prepare an income statement for the month of June 2020. (LO3, LO4 and LO6) (a) 2020 June 1 Cash at Bank 1 584 Sales 1 440 GST Payable 144 12 consoles sold for cash. Cost of Sales 1 080 Inventory 1 080 Cost of consoles sold. 2 Accounts Payable 2 160 Cash at Bank 2 160 Payment for consoles purchased on 6 May 4 Inventory 2 880 GST Receivable 288 Accounts Payable 3 168 Purchase of consoles on credit 5 Sales Returns & Allowances 480 GST Payable 48 Cash at Bank 528 Refund for consoles returned. Inventory 360 Cost of Sales 360 Consoles returned to inventory. 8 Freight Inwards 20 GST Receivable 2 Cash at Bank 22 Freight on June 4 purchase. 10 Accounts Payable 297 Inventory 270 GST Receivable 27 Returned 5 consoles purchased on 4 June. 12 Accounts Receivable 2 376 Sales 2 160 GST Payable 216 Sold 20 consoles on credit. Cost of Sales 1 620 Inventory 1 620 Cost of consoles sold. 14 Accounts Payable 2 871 Discount Received 52.20 GST Receivable 5.22 Cash at Bank 2 815.58 32 units – 3 returned = 29 Paid for 4 June purchase. 23 Sales Returns & Allowances 360 GST Payable 36 Accounts Receivable 396 Consoles returned by customer. Inventory 270 Cost of Sales 270 Consoles returned put back into inventory. Cash at Bank 1 980 Accounts Receivable 1 980 Cash received from customer. June 24 Inventory 3600 GST Receivable 360 Accounts Payable 3960 40 consoles purchased on credit. 29 Accounts Payable 3960 Discount Received 72.00 GST Receivable 7.20 Cash at Bank 3880.80 Paid for 24 June purchase. Inventory shortage Physical Count 103 consoles @ $90 Records show 106 consoles @ $90 should be on hand. Entry to record shortage 3 consoles @ $90. Inventory Shortage Expense 270 Inventory 270 Inventory short by 5 consoles. (b) Closing entries June 30 Profit or Loss Summary 3 200 Sales Returns & Allows 840 Cost of Sales 2 070 Inventory shortage 270 Freight Inwards 20 Close debit temporary accounts Discount Received 72 Sales 3 600 Profit or Loss Summary 3672 Close credit temporary accounts Profit or Loss Summary 472 Retained Earnings 472 Transfer profit to retained earnings. (c) Perpetual VAUCLUSE LTD Income Statement for the month ended 30 June 2020 INCOME Sales revenue $3 600 Less: Sales returns and allowances 840 Net sales revenue 2 760 Cost of sales 2090 Less: Discount received 72 2021 GROSS PROFIT 742 Less: Expenses Inventory shortage 270 PROFIT 472 Problem 6.19 Perpetual inventory system Non-GST version Cliff Clarendon opened a wine store on 1 June 2019. The business trades under the name of Wine to Dine and uses a perpetual inventory system to account for its inventory. Assume no GST requirements. All credit sales are made on the following terms: 2/10, n/30. Transactions for the business in June 2019 were as follows. At the end of the month, Cliff Clarendon undertook a physical stocktake and calculated that inventory worth $79 800 was still on hand and that promotional supplies of $8600 were still in storage. He also estimated that electricity usage for the month was $500 and that telephone usage for the month was $320. No tax invoices had been received from either supplier by 30 June. Required (a) Prepare general journal entries for June 2019 for the above transactions, including any adjusting entries at the end of the month. (b) Calculate the profit for the business for the month of June 2019. (c) Explain how the entries in A would differ if the business had used the periodic inventory system. (LO3 and LO4) (a) 2019 June 1 Cash at Bank 185 000 Store Equipment 48 720 Cliff Clarendon, Capital 233 720 Assets invested by owner into the business. 2 Inventory 55 200 Accounts Payable 55 200 Wine purchased from Blacktown Winery. 3 Rent Expense 1 800 Cash at Bank 1 800 Rent paid for the month of June. 4 Inventory 38 000 Accounts Payable 38 000 Wine purchased from Hall Wines. 5 Accounts Receivable 14 000 Sales 14 000 Wine sold to C. Tamarara. Cost of Sales 9 200 Inventory 9 200 Cost of merchandise sold. 2019 June 6 Promotional Supplies 11 440 Accounts Payable 11 440 Promotional supplies purchased from G. Epping. 8 Inventory 27 600 Accounts Payable 27 600 White wine purchased from Voss Vineyard. 10 Accounts Receivable 28 000 Sales 28 000 Merchandise sold to Oatville Hotel. Cost of Sales 21 100 Inventory 21 100 Cost of merchandise sold. 12 Inventory 23 000 Accounts Payable 23 000 Wine purchased from Gladwood Estate. 14 Accounts Payable 55 200 Discount Received 1 104 Cash at Bank 54 096 Paid Blacktown Winery, less discount. 15 Cash at Bank 13 720 Discount Allowed 280 Accounts Receivable 14 000 Cash received from C. Tamarara, and discount taken. 2019 June 18 Accounts Receivable 22 000 Sales 22 000 Merchandise sold to J. Haberfield. Cost of Sales 13 800 Inventory 13 800 Cost of merchandise sold. 18 Cash at Bank 27 440 Discount Allowed 560 Accounts Receivable 28 000 Cash received from Oatville Hotel, less discount. 21 Accounts Receivable 18 400 Sales 18 400 Merchandise sold to Slater Ltd. Cost of Sales 11 500 Inventory 11 500 Cost of merchandise sold. 21 Accounts Payable 23 000 Discount Received 460 Cash at Bank 22 540 Paid Gladwood Estate, less discount. 22 Inventory 28 000 Accounts Payable 28 000 Goods purchased from Blacktown Winery. 23 Cash at Bank 14 900 Sales 14 900 Merchandise sold for cash. 2019 June 23 Cost of Sales 8 600 Inventory 8 600 Cost of merchandise sold. 25 Accounts Payable 6 600 Inventory 6 600 Defective wine returned to Blackwood winery. 28 Accounts Receivable 41 000 Sales 41 000 Merchandise sold to Berrillee Partners. 28 Cost of Sales 28 000 Inventory 28 000 Cost of merchandise sold. 29 Inventory 9 200 Accounts Payable 9 200 Goods purchased from K. Leonay. 30 Sales Salaries Expense 2 900 Cash at Bank 2 900 Physical Count of inventory was $79 800 Promotional supplies on hand were $8 600 Adjusting entries 30 Inventory Shortage Expense 2 400 Inventory 2 400 Inventory missing after stocktake Promotional Supplies Used 1 800 Promotional Supplies 1 800 Supplies used for the month 2019 June 30 Depreciation Expense 580 Accum. Dep’n – Store Equipment 580 Depreciation for the month. Electricity Expense 500 Electricity Expense Payable 500 Estimated costs of electricity used. Telephone Expense 320 Telephone Expense Payable 320 Estimated costs of telephone usage. (b) WINE TO DINE Income Statement for the month ended 30 June 2019 INCOME Sales Revenue $138 300 Less: Discount allowed 840 Net sales revenue 137 460 Cost of sales 92 200 Less: Discount received 1 564 90 636 GROSS PROFIT 46 824 EXPENSES: Rent expense $1 636 Sales salaries expense 2 900 Depreciation expense – store equip’t 580 Promotional supplies expense 1 800 Electricity expense 500 Telephone expense 320 Inventory shortage expense 2 400 10 136 PROFIT $36 688 (c) If the business had used a periodic inventory system, many of the entries in A. above would change. Each time a purchase of inventory is made, the debit would be to the Purchases account instead of to the Inventory account. Every time a sale of inventory is made, the debit entry to Cost of Sales and the corresponding credit to Inventory would not be recorded, as the periodic inventory system does not keep track of inventory movements during the year. Furthermore, when inventory is returned to the supplier, as is the case on 25 June when goods are returned to Blackwood Winery, the credit entry would be made to a Purchases Returns and allowances account, rather than to inventory. Finally, when the stocktake is taken, the periodic inventory system assumes that if merchandise is not on hand, then it has been sold. In other words, it is impossible to determine the inventory shortage expense under the periodic inventory system. The inventory shortage becomes hidden in the cost of sales expense. Cost of sales is determined simply as the total cost of Purchases less Purchases Returns and Allowances, discount received and less Ending Inventory, as calculated in the physical stocktake. Problem 6.19 Perpetual inventory system GST version Cliff Clarendon opened a wine store on 1 June 2019. The business trades under the name of Wine to Dine and uses a perpetual inventory system to account for its inventory. The business was registered for GST. All credit sales are made on the following terms: 2/10, n/30. Transactions for the business in June 2019 were as follows. June 1 2 3 4 5 6 8 Clarendon invested $185 000 cash and $48 720 of store equipment into the business. The store equipment is to be depreciated evenly over 7 years. Purchased an inventory of wine from Blacktown Winery on credit for $55 200 plus GST; terms: 2/15, n/30. Paid $1800 rent for June 2019, including GST. Purchased additional inventory of wine from Hall Wines on credit for $38 000 plus GST; terms: n/30. Sold some merchandise to C. Tamarara on credit for $14 000 plus GST. Cost of this merchandise was $9200. Purchased promotional supplies for cash from G. Epping for $11 440, which included GST. Purchased a supply of white wines from Voss Vineyard, for $27 600 cash, plus GST. 10 12 14 15 18 18 21 21 22 23 25 28 29 30 Sold merchandise costing $21 100 to Oatville Hotel on credit for $28 000 plus GST. Purchased Wine from Gladwood Estate on credit for $23 000 plus GST; terms were 2/10, n/30. Paid Blacktown Winery for 2 June purchase. Received payment from C. Tamarara in payment of the account. The discount had been taken by Tamarara. Sold merchandise costing $13 800 to J. Haberfield on credit for $22 000 plus GST. Received payment from Oatville Hotel in payment of its account, less discount. Sold merchandise costing $11 500 to Slater Ltd on credit for $18 400 plus GST. Paid Gladwood Estate for 12 June purchase. Purchased additional merchandise from Blacktown Winery on credit for $28 000 plus GST; terms: 2/15, n/30. Sold for cash, wine costing $8600 to walk in customers, for $14 900 plus GST. Returned bad wine that cost $6600 including GST back to Blackwood Winery. Sold wines costing $28 000 to Berrillee Partners on credit for $41 000 plus GST. Purchased inventory from K. Leonay on credit for $9200 plus GST; terms: 1/10, n/30. Paid month’s salary to sales assistant, $2900. At the end of the month, Cliff Clarendon undertook a physical stocktake and calculated that inventory worth $79 800 was still on hand and that promotional supplies of $8600 were still in storage. He also estimated that electricity usage for the month was $500 and that telephone usage for the month was $320. No tax invoices had been received from either supplier by 30 June. Required (a) Prepare general journal entries for June 2019 for the above transactions, including any adjusting entries at the end of the month. (b) Calculate the profit for the business for the month of June 2019. (c) Explain how the entries in A would differ if the business had used the periodic inventory system. (LO3 and LO4) (a) 2019 June 1 Cash at Bank 185 000 Store Equipment 48 720 Cliff Clarendon, Capital 233 720 Assets invested by owner into the business. 2 Inventory 55 200 GST Receivable 5 520 Accounts Payable 60 720 Wine purchased from Blacktown Winery. 3 Rent Expense (1 800 × 10/11) 1636.36 GST Receivable (10% × 1 636.36) or (1 800 × 1/11) 163.64 Cash at Bank 1 800 Rent paid for the month of June. 4 Inventory 38 000 GST Receivable 3 800 Accounts Payable 41 800 Wine purchased from Hall Wines. 5 Accounts Receivable 15 400 GST Payable 1 400 Sales 14 000 Wine sold to C. Tamarara. Cost of Sales 9 200 Inventory 9 200 Cost of merchandise sold. 2019 June 6 Promotional Supplies 10 400 GST Receivable 1 040 Accounts Payable 11 440 Promotional supplies purchased from G. Epping. 8 Inventory 27 600 GST Receivable 2 760 Accounts Payable 30 360 White wine purchased from Voss Vineyard. 10 Accounts Receivable 30 800 GST Payable 2 800 Sales 28 000 Merchandise sold to Oatville Hotel. Cost of Sales 21 100 Inventory 21 100 Cost of merchandise sold. 12 Inventory 23 000 GST Receivable 2 300 Accounts Payable 25 300 Wine purchased from Gladwood Estate. 14 Accounts Payable 60 720 Discount Received 1 104.00 GST Receivable 110.40 Cash at Bank 59 505.60 Paid Blacktown Winery, less discount. 15 Cash at Bank 15 092 Discount Allowed 280 GST Payable 28 Accounts Receivable 15 400 Cash received from C. Tamarara, and discount taken. 2019 June 18 Accounts Receivable 24 200 GST Payable (10% x 22 000) 2 200 Sales 22 000 Merchandise sold to J. Haberfield. Cost of Sales 13 800 Inventory 13 800 Cost of merchandise sold. 18 Cash at Bank 30 184 Discount Allowed 560 GST Payable 56 Accounts Receivable 30 800 Cash received from Oatville Hotel, less discount. 21 Accounts Receivable 20 240 GST Payable 1 840 Sales 18 400 Merchandise sold to Slater Ltd. Cost of Sales 11 500 Inventory 11 500 Cost of merchandise sold. 21 Accounts Payable 25 300 Discount Received 460 GST Receivable 46 Cash at Bank 24 794 Paid Gladwood Estate, less discount. 22 Inventory 28 000 GST Receivable 2 800 Accounts Payable 30 800 Goods purchased from Blacktown Winery. 23 Cash at Bank 16 390 GST Payable 1 490 Sales 14 900 Merchandise sold for cash. 2019 June 23 Cost of Sales 8 600 Inventory 8 600 Cost of merchandise sold. 25 Accounts Payable 6 600 GST Receivable 600 Inventory 6 000 Defective wine returned to Blackwood winery. 28 Accounts Receivable 45 100 GST Payable 4 100 Sales 41 000 Merchandise sold to Berrillee Partners. 28 Cost of Sales 28 000 Inventory 28 000 Cost of merchandise sold. 29 Inventory 9 200 GST Receivable 920 Accounts Payable 10 120 Goods purchased from K. Leonay. 30 Sales Salaries Expense 2 900 Cash at Bank 2 900 Physical Count of inventory was $79 800 Promotional supplies on hand were $8 600 Adjusting entries 30 Inventory Shortage Expense 3 000 Inventory 3 000 Inventory missing after stocktake Promotional Supplies Used 1 800 Promotional Supplies 1 800 Supplies used for the month 2019 June 30 Depreciation Expense 580 Accum. Dep’n – Store Equipment 580 Depreciation for the month. Electricity Expense 500 Electricity Expense Payable 500 Estimated costs of electricity used. Telephone Expense 320 Telephone Expense Payable 320 Estimated costs of telephone usage. (b) WINE TO DINE Income Statement for the month ended 30 June 2019 INCOME Sales Revenue $138 300 Less: Discount allowed 840 Net sales revenue 137 460 Cost of sales 92 200 Less: Discount received 1 564 90 636 GROSS PROFIT 46 824 EXPENSES: Rent expense $1 636 Sales salaries expense 2 900 Depreciation expense – store equip’t 580 Promotional supplies expense 1 800 Electricity expense 500 Telephone expense 320 Inventory shortage expense 3 000 10 736 PROFIT $36 088 (c) If the business had used a periodic inventory system, many of the entries in A. above would change. Each time a purchase of inventory is made, the debit would be to the Purchases account instead of to the Inventory account. Every time a sale of inventory is made, the debit entry to Cost of Sales and the corresponding credit to Inventory would not be recorded, as the periodic inventory system does not keep track of inventory movements during the year. Furthermore, when inventory is returned to the supplier, as is the case on 25 June when goods are returned to Blackwood Winery, the credit entry would be made to a Purchases Returns and allowances account, rather than to inventory. Finally, when the stocktake is taken, the periodic inventory system assumes that if merchandise is not on hand, then it has been sold. In other words, it is impossible to determine the inventory shortage expense under the periodic inventory system. The inventory shortage becomes hidden in the cost of sales expense. Cost of sales is determined simply as the total cost of Purchases less Purchases Returns and Allowances, discount received and less Ending Inventory, as calculated in the physical stocktake. Problem 6.20 Worksheet and completion of accounting cycle — perpetual inventory system Non-GST version A trial balance for Flemington Fashions Pty Ltd is shown below. Required (a) Prepare a worksheet for Flemington Fashions Pty Ltd. Use the following information to make adjusting entries. i. Supplies on hand at 30 June, $260. ii. Depreciation on the store equipment, $8385. iii. Interest accrued on the loan payable, $1980. iv. Income tax expense and payable for the year, $19 600. (b) Prepare an income statement, a statement of changes in equity and a balance sheet for the year ended 30 June 2020. (c) Prepare closing entries. (LO5 and LO6) (a) (b) FLEMINGTON FASHIONS PTY LTD Income Statement for the year ended 30 June 2020 INCOME Sales Revenue $302 520 Less: Sales returns and allowances $2 740 Discount allowed 1 200 3 940 NET SALES REVENUE 298 580 Cost of sales 176 280 Add: Freight inwards 2 910 Less: Discount received (2 590) Total cost of sales 176 600 GROSS PROFIT 121 980 EXPENSES: Selling and distribution expenses: Sales salaries expense $49 780 Depreciation expense – store equipment 8 385 Supplies expense 565 58 730 Finance and other expenses: Interest expense 1 980 60 710 Profit before tax 61 270 Less: Income tax expense 19 600 PROFIT $41 670 FLEMINGTON FASHIONS PTY LTD Statement of Changes in Equity for the year ended 30 June 2020 Retained earnings – 1 July 2019 $22 680 Profit for the year 41 670 Retained earnings – 30 June 2020 $64 350 Share Capital (unchanged) 90 890 FLEMINGTON FASHIONS PTY LTD Balance Sheet as at 30 June 2020 CURRENT ASSETS: Cash at bank $42 245 Accounts receivable 45 175 Inventory 59 360 Supplies 260 $147 040 NON-CURRENT ASSETS: Store equipment 94 630 Less: accumulated depreciation (28 650) 65 980 TOTAL ASSETS 213 020 CURRENT LIABILITIES: Accounts payable 9 580 Interest payable 1 980 Current tax liability 19 600 31 160 NON-CURRENT LIABILITIES Loan payable 26 620 TOTAL LIABILITIES 57 780 NET ASSETS $155 240 EQUITY Share capital 90 890 Retained earnings 64 350 TOTAL EQUITY $155 240 (c) Closing entries Profit or Loss Summary 263 440 Sales Returns & Allowances 2 740 Cost of Sales 176 280 Freight Inwards 2 910 Sales Salaries Expense 49 780 Depreciation Expense – Store Equipment 8 385 Supplies Expense 565 Interest Expense 1 980 Income Tax Expense 19 600 Discount Allowed 1 200 Close debit accounts Sales 302 520 Discount Received 2 590 Profit or Loss Summary 305 110 Close credit accounts. Profit or Loss Summary 41 670 Retained Earnings 41 670 Transfer profit to retained earnings. Problem 6.20 Worksheet and completion of accounting cycle — perpetual inventory system GST version A trial balance for Flemington Fashions Pty Ltd is shown below. FLEMINGTON FASHIONS PTY LTD Unadjusted Trial Balance as at 30 June 2020 Account Debit Credit Cash at bank Accounts receivable Inventory Supplies GST receivable Store equipment Accumulated depreciation – store equipment Accounts payable Loan payable GST payable Share capital Retained earnings Sales Sales returns and allowances Discount received Cost of sales Freight inwards Discount allowed Sales salaries expense $ 42 245 45 175 59 360 825 1 210 94 630 2 740 176 280 2 910 1 200 49 780 $ 20 265 9 580 26 620 2 420 90 890 21 470 302 520 2 590 $ 476 355 $ 476 355 Required (a) Prepare a worksheet for Flemington Fashions Pty Ltd. Use the following information to make adjusting entries. i. Supplies on hand at 30 June, $260. ii. Depreciation on the store equipment, $8385. iii. Interest accrued on the loan payable, $1980. iv. Income tax expense and payable for the year, $19 600. (b) Prepare an income statement, a statement of changes in equity and a balance sheet for the year ended 30 June 2020. (c) Prepare closing entries. (LO5 and LO6) (b) FLEMINGTON FASHIONS PTY LTD Income Statement for the year ended 30 June 2020 INCOME Sales Revenue $302 520 Less: Sales returns and allowances $2 740 Discount allowed 1 200 3 940 NET SALES REVENUE 298 580 Cost of sales 176 280 Add: Freight inwards 2 910 Less: Discount received (2 590) Total cost of sales 176 600 GROSS PROFIT 121 980 EXPENSES: Selling and distribution expenses: Sales salaries expense $49 780 Depreciation expense – store equipment 8 385 Supplies expense 565 58 730 Finance and other expenses: Interest expense 1 980 60 710 Profit before tax 61 270 Less: Income tax expense 19 600 PROFIT $41 670 FLEMINGTON FASHIONS PTY LTD Statement of Changes in Equity for the year ended 30 June 2020 Retained earnings – 1 July 2019 $21 470 Profit for the year 41 670 Retained earnings – 30 June 2020 $63 140 Share Capital (unchanged) 90 890 FLEMINGTON FASHIONS PTY LTD Balance Sheet as at 30 June 2020 CURRENT ASSETS: Cash at bank $42 245 Accounts receivable 45 175 Inventory 59 360 Supplies 260 $147 040 NON-CURRENT ASSETS: Store equipment 94 630 Less: accumulated depreciation (28 650) 65 980 TOTAL ASSETS 213 020 CURRENT LIABILITIES: Accounts payable 9 580 Interest payable 1 980 Current tax liability 19 600 GST Payable 1 210 32 370 NON-CURRENT LIABILITIES Loan payable 26 620 TOTAL LIABILITIES 58 990 NET ASSETS $154 030 EQUITY Share capital 90 890 Retained earnings 63 140 TOTAL EQUITY $154 030 (c) Closing entries Profit or Loss Summary 263 440 Sales Returns & Allowances 2 740 Cost of Sales 176 280 Freight Inwards 2 910 Sales Salaries Expense 49 780 Depreciation Expense – Store Equipment 8 385 Supplies Expense 565 Interest Expense 1 980 Income Tax Expense 19 600 Discount Allowed 1 200 Close debit accounts Sales 302 520 Discount Received 2 590 Profit or Loss Summary 305 110 Close credit accounts. Profit or Loss Summary 41 670 Retained Earnings 41 670 Transfer profit to retained earnings. Problem 6.21 Journal entries, T accounts, closing entries — perpetual inventory system Non-GST version Seaforth Sunglasses had the following transactions in December. The beginning inventory on 1 December consisted of 320 pairs of sunglasses at $80 each. Required (a) Prepare journal entries to record the transactions, assuming that a perpetual inventory system is used. (b) Post the entries to T accounts, assuming no beginning balances in the cash, receivables and payables accounts. (c) Assuming that the business closes its accounting records each month, prepare entries to close the income statement accounts based on the above data and assuming that all other expenses for December amounted to $8430. (LO3, LO4 and LO5) (a) General journal Dec 3 Inventory (302  $80) 24 160 Accounts Payable 24 160 Purchased units on credit. 9 Accounts Payable (10  $80) 800 Inventory 800 Returned defective units. 14 Accounts Receivable 28 500 Sales (190  $150) 28 500 Sold 190 units on credit. Cost of Sales 15 200 Inventory (190  $80) 15 200 Recorded cost of the goods sold. 26 Sales Returns and Allowances 450 Accounts Receivable (3  $150) 450 Units returned by customers. Inventory (3  $80) 240 Cost of Sales 240 Units returned put back into inventory. 27 Accounts Receivable 10 240 Sales (64  $160) 10 240 Sold 64 units on credit. Cost of Sales 5 120 Inventory (64  $80) 5 120 Cost of the goods sold. 31 Inventory Shortage Expense 240 Inventory (3  $80) 240 Units on hand = 358. Inventory shortage of 3 pairs of glasses. (b) Accounts Receivable Dec 14 Sales 28 500 Dec 26 Sales returns 450 27 Sales 10 240 31 Balance c/d 38 290 $38 740 $38 740 31 Balance b/d 38 290 Inventory Dec 1 Balance b/d 25 600 Dec 9 Accounts payable 800 3 Accounts payable 24 160 14 Cost of sales 15 200 26 Cost of sales 240 27 Cost of sales 5 120 31 Inventory shortage 240 31 Balance c/d 28 640 $50 000 $50 000 31 Balance b/d 28 640 Accounts Payable Dec 9 Inventory 800 Dec 3 Inventory 24 160 31 Balance c/d 23 360 $24 160 $24 160 31 Balance b/d 23 360 Sales Dec 14 Accnts receivable 28 500 Dec 31 Closing ent. (C) 38 740 25 Accnts receivable 10 240 $38 740 $38 740 Sales Returns and Allowances Dec 26 Accnts receivable 450 Dec 31 Closing ent. (C) 450 Cost of Sales Dec 14 Inventory 15 200 Dec 26 Inventory 240 27 Inventory 5 120 31 Closing entry (C) 20 080 $20 320 $ 20 320 Inventory Shortage Expense Dec 31 Inventory 240 Dec 31 Closing entry (C) 240 (c) Dec. 31 Profit or Loss Summary 29 200 Sales Returns and Allowances 450 Cost of Sales 20 080 Inventory Shortage Expense 240 Other Expenses 8 430 Close debit accounts. Sales 38 740 Profit or Loss Summary 38 740 Close credit accounts. Capital OR Retained Earnings 9 540 Profit or Loss Summary 9 540 Transfer loss to retained earnings or capital Problem 6.21 Journal entries, T accounts, closing entries — perpetual inventory system GST version Seaforth Sunglasses had the following transactions in December. The beginning inventory on 1 December consisted of 320 pairs of sunglasses at $80 each. Assume Seaforth Sunglasses is registered for GST. Required (a) Prepare journal entries to record the transactions, assuming that a perpetual inventory system is used. (b) Post the entries to T accounts, assuming no beginning balances in the cash, receivables and payables accounts. (c) Assuming that the business closes its accounting records each month, prepare entries to close the income statement accounts based on the above data and assuming that all other expenses for December amounted to $8430. (LO3, LO4 and LO5) (a) General journal Dec 3 Inventory (302  $80) 24 160 GST Receivable 2 416 Accounts Payable 26 576 Purchased units on credit. 9 Accounts Payable (10  $80+ GST) 880 GST Receivable 80 Inventory 800 Returned defective units. 14 Accounts Receivable 31 350 GST Payable 2 850 Sales (190  $150) 28 500 Sold 190 units on credit. Cost of Sales 15 200 Inventory (190  $80) 15 200 Recorded cost of the goods sold. 26 Sales Returns and Allowances 450 GST Payable 45 Accounts Receivable (3  $150) 495 Units returned by customers. Inventory (3  $80) 240 Cost of Sales 240 Units returned put back into inventory. 27 Accounts Receivable 11 264 GST Payable 1 024 Sales (64  $160) 10 240 Sold 64 units on credit. Cost of Sales 5 120 Inventory (64  $80) 5 120 Cost of the goods sold. 31 Inventory Shortage Expense 240 Inventory (3  $80) 240 Units on hand = 358. Inventory shortage of 3 pairs of glasses. (b) Accounts Receivable Dec 14 Sales 28 500 Dec 26 Sales returns 450 27 Sales 10 240 31 Balance c/d 38 290 $38 740 $38 740 31 Balance b/d 38 290 GST Receivable Dec 3 Accounts payable 2 416 Dec 9 Accounts payable 80 31 Balance c/d 2 336 $2 416 $2 416 31 Balance b/d 2 336 Inventory Dec 1 Balance b/d 25 600 Dec 9 Accounts payable 800 3 Accounts payable 24 160 14 Cost of sales 15 200 26 Cost of sales 240 27 Cost of sales 5 120 31 Inventory shortage 240 31 Balance c/d 28 640 $50 000 $50 000 31 Balance b/d 28 640 Accounts Payable Dec 9 Inventory 800 Dec 3 Inventory 24 160 31 Balance c/d 23 360 $24 160 $24 160 31 Balance b/d 23 360 GST Payable Dec 26 Accounts rec 45 Dec 14 Accounts rec 2 850 31 Balance c/d 3 829 27 1 024 $3 874 $3 874 31 Balance b/d 3 829 Sales Dec 14 Accnts receivable 28 500 Dec 31 Closing ent. (C) 38 740 25 Accnts receivable 10 240 $38 740 $38 740 Sales Returns and Allowances Dec 26 Accnts receivable 450 Dec 31 Closing ent. (C) 450 Cost of Sales Dec 14 Inventory 15 200 Dec 26 Inventory 240 27 Inventory 5 120 31 Closing entry (C) 20 080 $20 320 $ 20 320 Inventory Shortage Expense Dec 31 Inventory 240 Dec 31 Closing entry (C) 240 (c) Dec. 31 Profit or Loss Summary 29 200 Sales Returns and Allowances 450 Cost of Sales 20 080 Inventory Shortage Expense 240 Other Expenses 8 430 Close debit accounts. Sales 38 740 Profit or Loss Summary 38 740 Close credit accounts. Capital OR Retained Earnings 9 540 Profit or Loss Summary 9 540 Transfer loss to retained earnings or capital Problem 6.22 Income statement and ratios — periodic inventory system The following selected information is available for Middleton Wholesalers for September 2019. Required (a) Prepare the detailed income statement for Middleton Wholesalers for the month ended 30 September 2019. (b) Calculate the ratio of gross profit to net sales and express as a percentage. (c) Calculate the ratio of profit to net sales and express as a percentage. (d) What might these ratios indicate? (LO6 and LO8) (a) MIDDLETON WHOLESALE Income Statement for the month ended 30 September 2019 INCOME Sales Revenue $134 800 Less: Sales returns and allowances 2 600 Discount allowed 2 780 5 380 Net sales revenue 129 420 Cost of sales: Beginning inventory $55 200 Add: Cost of purchases $73 100 Less: Purchases returns and allowances (1 040) Freight Inwards 1 560 Less: Discount received (1 220) 72 400 Cost of goods available for sale 127 600 Less: Cost of ending inventory 31 600 Cost of sales 96 000 GROSS PROFIT 33 420 EXPENSES Sales salaries expense 11 100 Freight outwards 540 Advertising expense 1 900 Insurance expense 240 Rent expense 1 300 Office salaries expense 10 100 Depreciation expense – office equipment 100 Office supplies expense 310 25 590 PROFIT $7 830 (b) ($33 420/$129 420)  100 = 25.8%% (c) ($7 830/$129 420)  100 = 6.1% (d) These ratios indicate that for each dollar of net sales, the company is earning 25.8 cents in gross profit, and 6.1 cents in (net) profit. Information as to the results of competitors and of this company’s trends over time should indicate whether these figures are good, or a cause for alarm. Problem 6.23 Worksheet and completion of accounting cycle — periodic inventory system Pete’s Computer Shop is a sole trader run by Pete Narellan. The unadjusted trial balance of Pete’s Computer Shop is shown below. Required (a) Prepare a worksheet for Pete’s Computer Shop. Use the following information to make the year-end adjustments. i. Prepaid insurance expired during the year, $1290. ii. Depreciation on the store equipment, $3100; and on delivery van, $1540. iii. Accrued interest on the loan payable, $745. The ending inventory determined by physical count was $36 430. (b) Prepare an income statement, a statement of changes in capital and a balance sheet for the year ended 30 June 2020. (c) Prepare adjusting and closing entries. (d) Prepare a post-closing trial balance. (LO5 and LO6) (a) Worksheet for the year ended June 2020: (b) PETE’S COMPUTER SHOP Income Statement for the year ended 30 June 2020 INCOME Sales Revenue $282 060 Less: Sales returns and allowances $11 100 Discount allowed 1 360 12 460 Net sales revenue 269 600 Cost of sales: Beginning inventory $44 970 Add: Cost of purchases $152 600 Less: Purchases returns and allowances (9 720) Add: Freight Inwards 3 130 Less: Discount received (810) 145 200 Cost of goods available for sale 190 170 Less: Cost of ending inventory 36 430 Cost of sales 153 740 GROSS PROFIT 115 860 EXPENSES Selling and distribution expenses: Sales salaries expense 32 760 Freight outwards 1 520 Depreciation exp. – store equipment 3 110 Depreciation exp. – delivery van 1 540 38 930 Administrative expenses: Office salaries expense 35 120 Insurance expense 1 290 36 410 Financial expenses Interest expense 2 365 77 705 PROFIT $38 155 PETE’S COMPUTER SHOP Statement of Changes in Capital for the year ended 30 June 2020 Capital – 1 July 2019 $50 640 Add: Profit for the year 38 155 88 795 Less: Drawings 16 550 Capital – 30 June 2020 $72 245 PETE’S COMPUTER SHOP Balance Sheet as at 30 June 2020 CURRENT ASSETS: Cash at bank $16 640 Accounts receivable 19 930 Inventory 36 430 Prepaid insurance 510 $73 510 NON-CURRENT ASSETS: Store equipment 29 680 Less: Accumulated depreciation (11 890) 17 790 Delivery van 7 440 Less: Accumulated depreciation (4 650) 2 790 20 580 TOTAL ASSETS $94 090 CURRENT LIABILITIES: Accounts payable 9 700 Interest payable 745 10 445 NON-CURRENT LIABILITIES Loan payable 11 400 TOTAL LIABILITIES 21 845 NET ASSETS $72 245 EQUITY Pete Narellan, Capital $72 245 (c) Adjusting entries 1. Insurance Expense 1 290 Prepaid Insurance 1 290 Adjust for expired insurance. 2. Depr. Expense – Store Equipment 3 100 Accum. Depr. – Store Equip. 3 100 Depreciate store equipment. 3. Depr. Expense – Delivery Van 1 540 Accum. Depr. – Delivery Van 1 540 Depreciate delivery van. 4. Interest Expense 745 Interest Payable 745 Accrued interest on loan. Closing entries Profit or Loss Summary 290 865 Inventory 44 970 Sales Returns and Allowances 11 100 Purchases 152 600 Freight Inwards 3 130 Freight Outwards 1 520 Sales Salaries Expense 32 760 Office Salaries Expense 35 120 Insurance Expense 1 290 Depr. Expense – Store Equipment 3 110 Depr. Expense – Delivery Van 1 540 Interest Expense 2 365 Discount Allowed 1 360 Close debit accounts. Inventory 36 430 Sales 282 060 Purchases Returns and Allowances 9 720 Discount Received 810 Profit or Loss Summary 329 020 Close credit accounts. Profit or Loss Summary 38 155 Pete Narellan, Capital 38 155 Transfer profit to Capital Pete Narellan, Capital 16 550 Peter Narellan, Drawings 16 550 Transfer dividends paid to Capital (d) PETE’S COMPUTER SHOP Post-Closing Trial Balance as at 30 June 2020 Debit Credit Cash at bank $16 640 Accounts receivable 19 930 Inventory 36 430 Prepaid insurance 510 Store equipment 29 680 Accum. depr. – store equipment $11 890 Delivery van 7 440 Accum. depr. – delivery van 4 650 Accounts payable 9 700 Loan payable 11 400 Interest payable 745 Pete Narellan, Capital 72 245 $110 630 $110 630 Problem 6.24 Profitability analysis The following data have been extracted from the income statement of Llandilo Furniture Store. Required (a) Calculate the gross profit ratio, profit margin, and expenses to sales ratio for the years 2019 and 2020. (b) Assuming that the inventory at the beginning of 2019 is $63 300, calculate the inventory turn-over for 2019 and 2020. (c) Advise management on any trends in these ratios, and any actions you consider necessary. (LO8) (a) and (b) 2020 2019 Gross profit $213 470 $245 210 Gross profit ratio 39.1% 40.7% Profit margin 18.8% 24.1% Expenses $111 120 $99 890 Expenses to net sales 20.4% 16 6% Inventory turnover 4.31 times 5.01 times (c) There was a decline in the gross profit ratio from 40.7% to 39.1%. This is because sales decreased by 9.3% but cost of sales only decreased by 6.9% thus reducing the gross profit margin. The profit margin also decreased from 24.1% to 18.8%. This was caused through lower gross profit margin and an increase in other expenses from $99 890 to $111 120 while sales were falling. The expenses to sales percentage has increased from 16.6% to 20.4% indicating that additional costs have been incurred for each dollar of sales achieved. The inventory turnover ratios have also worsened from 5.01 to 4.31 times, indicating a potential slowdown in the market as reflected in the lower sales. Recommendations are to negotiate better prices for inventory bought for resale. The decrease in gross margin suggests that retail prices fell faster than wholesale prices. There is a need to reduce cost of sales expense. This could be achieved by negotiating lower prices for larger inventory purchases. Problem 6.25 Correction of errors The income statement below for Guildford Granaries was prepared by the accountant from the accounting records at 30 June 2020. This statement showed a significant improvement over the preceding year when the profit for the year ended 30 June 2019 was $344 700. On 14 July 2020, while reviewing inventory records, the accountant noticed that incoming shipments of goods received near the annual closing dates had been handled as follows. 1. Purchases in transit on 30 June 2019, amounting to $29 600, had not been included in the ending inventory for that year although the invoice for the goods had been entered in the accounting records on 28 June 2019 and the goods had been shipped on 29 June from the supplier (i.e. ownership of the merchandise had passed on that date). 2. Goods on hand at 30 June 2020, amounting to $16 400, were not included in the ending inventory at that date. They had been omitted because the purchase invoice for this shipment had not been received and the employee supervising the physical stocktake believed that the goods were not the property of the business until the invoice was received. The invoice in question arrived by mail late on 30 June 2020, but no entry was made for it before closing the accounts for 2020. The invoice was recorded on 6 July 2020 as a July transaction. Required (a) Calculate the corrected final profit for the years 2019 and 2020. State the effect of the errors on the profit for the year 2020. (b) Indicate which items, if any, were incorrectly stated in the income statement for 2020, and in the balance sheet prepared at 30 June 2020. Indicate also whether the items were understated or overstated, and the amount of the error in dollar terms. (c) Prepare any correcting journal entries necessary on 14 July 2020. (LO3, LO4 and LO6) (a) Corrected final profits. Year ended 30 June 2019 $344 700 + $29 600* = $374 300 Year ended 30 June 2020 $397 000 – $29 600** = $367 400 * Cost of sales should have been $ 29600 lower and hence profit $29 600 higher. ** For the year ended 30 June 2020, the beginning inventory should be higher by $29 600, cost of sales should be $29 600 higher, and hence profit $29 600 lower. Since, at 30 June 2020, $16 400 had not been entered, its inclusion would have seen purchases, goods available for sale and ending inventory all increase by $16 400; cost of sales and hence profit would not have been affected. For the year ended 30 June 2021, purchases will be recorded at $16 400 higher than they should be and hence cost of sales would be higher. However, beginning inventory which was recorded at $16 400 less than it should have been will offset this. Therefore, effect on profit will be zero. (b) Items incorrectly stated in income statement. Inventory 1 July 2019 understated by $29 600. Purchases understated by $16 400. Net cost of purchases understated by $16 400. Cost of goods available for sale understated by $46 000. Inventory 30 June understated by $16 400. Cost of sales understated by $29 600. Gross profit is overstated by $29 600. Profit is overstated by $29 600. Items incorrectly stated in the balance sheet. Inventory understated by $16 400. Accounts payable understated by $16 400. (overstated profit in 2020 cancels understated profit for 2019). (c) Correcting entry 14 July 2020: Inventory (opening) Dr $16 400 Purchases Cr $16 400 Recording the $16 400 of purchases as inventory. Problem 6.26 Worksheet and completion of accounting cycle — perpetual inventory system Ben’s Patisserie had the following balances in its ledger at 30 June 2019. Ben’s Patisserie’s financial year ends on 30 June. During the year the accountant prepared monthly statements using worksheets, but no adjusting entries were made in the journals and ledgers. Data for the year-end adjustments are as follows. 1. Prepaid insurance, 30 June 2019 , $1312. 2. Office supplies on hand, 30 June 2019, $2324. 3. Depreciation expense for year, furniture and fixtures, $4820. 4. Depreciation expense for year, delivery equipment, $13 230. 5. Sales salaries payable but unrecorded, $3200. 6. Office salaries payable but unrecorded, $880. Required (a) Prepare a worksheet for the year ended 30 June 2019. (b) Prepare an income statement for the year ended 30 June 2019. (c) Prepare a balance sheet as at 30 June 2019. (d) Make the necessary adjusting entries. (e) Make the closing entries. (f) Make any necessary reversing entries. (LO5 and LO6) (a) (b) BEN’S PATISSERIE Income Statement for the year ended 30 June 2019 INCOME Sales revenue $961 400 Less: Sales returns and allowances $13 332 Discount allowed 9 100 22 432 NET SALES 938 968 Less: Cost of sales ($549 744 + $12 480) 562 224 Discount received (11 232) 550 992 GROSS PROFIT 387 976 EXPENSES: Sales salaries expense 94 304 Delivery expense 24 400 Advertising expense 35 880 Depreciation expense – delivery equip. 13 230 Insurance expense 1 312 Rent expense 38 200 Office salaries expense 45 880 Electricity expense 13 300 Depreciation expense – furn. & fixtures 4 820 Office supplies expense 2 044 273 370 PROFIT $114 606 (c) BEN’S PATISSERIE Balance Sheet as at 30 June 2019 CURRENT ASSETS: Cash at bank $24 362 Accounts receivable 102 528 Inventory 145 600 Prepaid insurance 6 560 Office supplies on hand 2 324 TOTAL CURRENT ASSETS 281 374 NON-CURRENT ASSETS: Furniture and fixtures $53 040 Less: Accumulated depreciation (19 380) 33 660 Delivery equipment 62 400 Less: Accumulated depreciation (38 190) 24 210 TOTAL NON-CURRENT ASSETS 57 870 TOTAL ASSETS $339 244 CURRENT LIABILITIES: Accounts payable 36 036 Salaries payable 4 080 TOTAL CURRENT LIABILITIES 40 116 NON-CURRENT LIABILITIES: Loan payable 156 000 TOTAL LIABILITIES 196 116 NET ASSETS $143 128 EQUITY: B. Jamin, Capital ($66 142 + $114 606 – $37 620) 143 128 TOTAL EQUITY $143 128 (d) Adjusting entries 30 June Insurance Expense 1 312 Prepaid Insurance 1 312 Expired insurance. Office Supplies Expense 2 044 Office Supplies on Hand 2 044 Office supplies held. Depreciation Expense – Furniture & Fixtures 4 820 Accumulated Depr. – Furniture & Fixtures 4 820 Depreciation for the year. Depreciation Expense – Delivery Equipment 13 230 Accumulated Depr. – Delivery Equipment 13 230 Depreciation for the year. Sales Salaries Expense 3 200 Office Salaries Expense 880 Salaries Payable 4 080 Accrued salaries. (e) Closing entries June 30 Sales 961 400 Discount Received 11 232 Profit or Loss Summary 972 632 Close accounts with credit balances. Profit or Loss Summary 858 026 Sales Returns & Allowances 13 332 Discount Allowed 9 100 Cost of Sales 549 744 Freight In 12 480 Sales Salaries Expense 94 304 Delivery Expense 24 400 Advertising Expense 35 880 Depreciation Expense – Delivery Equip. 13 230 Insurance Expense 1 312 Rent Expense 38 200 Office Salaries Expense 45 880 Electricity Expense 13 300 Depreciation Expense – Furn. & Fix. 4 820 Office Supplies Expense 2 044 Close accounts with debit balances. Profit or loss summary B Jamin Capital B Close Profit or loss summary account to Capital B Jamin Capital Drawings Close Drawings account to capital 114606 37620 114606 37620 (f) Reversing entry 2019 July 1 Salaries Payable 4 080 Sales Salaries Expense 3 200 Office Salaries Expense 880 Reverse accrual made 30 June. Case studies Decision analysis Jewellery store inventory records The All That Sparkles Store sells expensive limited edition jewellery items and maintains its inventory records manually, keeping a separate card for each type of jewellery in store. Every time jewellery is purchased or sold, the card for that item is adjusted. Once a year, staff count the inventory of jewellery and compare the amount with the cards. Appropriate alterations are made for differences between inventory on hand and the cards. Prue Diamond is in charge of the shop and she has decided that it is time to install a computer-based system. She has heard that there are two ways to account for inventory but she is not sure which method she has been using and which method to use if she computerises the inventory records. You are an accounting student working part time in the shop, so Prue approaches you for help. Required Explain the main differences between the two methods of accounting for inventory and how each method works. Which method of inventory has the All That Sparkles Store been using? Which inventory method would you recommend when the computerised accounting system is installed, and why? The perpetual inventory system keeps a continuous (perpetual) record of inventory on hand and inventory sold year to date. When inventory is purchased, it is recorded in an inventory control account in the general ledger and a record is kept in a subsidiary account, such as the card system the jewellery store has been using. When inventory is sold, the inventory is then transferred from the inventory account to the cost of sales account reported in the income statement and the subsidiary records are adjusted. The periodic inventory system records inventory purchases directly reported in the purchases account in the general ledger. At the end of the accounting period, a physical stocktake of inventory is taken and this is used to calculate the Cost of Sales to be shown in the income statement and also this balance of inventory is shown in the balance sheet. The advantages and disadvantages of each system are listed below: Perpetual system Advantages • Provides a current and continuous record of inventory transactions • Requires less clerical work • Provides more timely information to management for use in controlling and planning for inventory • Assists profit control as it enables management to obtain interim profit results without the need for a physical stocktake. Periodic system Disadvantages • More costly to operate (although with the advent of computerised inventory systems, this is not as significant as it once was. • Does not provide a record of goods sold or o hand throughout the year without undertaking a physical count or using one of the estimating methods available. • Most often used by a business that sells a large number of items with low unit cost. All That Sparkles Store has been using a perpetual inventory system as it keeps a separate card for each item of jewellery in the store and every time an item is purchased or sold, the card is adjusted. When the computerised accounting system is installed, it would be wise to keep the perpetual inventory system as computerisation will make this even simpler to do and the advantages listed above are greater than for the periodic inventory system. Critical thinking Read the following article Controlling inventory through new technology and answer the questions that follow. Required (a) How would inventory shrinkage be accounted for? (b) Which inventory system would be most useful in determining inventory shrinkage and why? (c) What type of inventory system would be used when RFIDs are used and why? (d) How would the use of RFIDs aid in doing a physical stocktake? (e) RFIDs seem to be a good solution to inventory shrinkage. Would it always be appropriate to use RFIDs to keep track of inventory? (a) Inventory shrinkage is accounted for by debiting and Inventory Shortage Expense and crediting Inventory. The Inventory Shortage Expense is only for internal purposes and is useful for management in keeping track of the level of stock shortages. Any sudden increases in this account would alert management to an issue like those discussed in the article. The Inventory Shortage Expense would not show in external reports as this could alert potential thieves of which stores were easier to steal from. The amount is usually included in the Cost of Sales in the external reports. This results in the same Cost of Sales whether using perpetual or periodic inventory and stock shortage is a normal (though undesirable) cost of selling goods. (b) Inventory shrinkage can only be truly calculated under the perpetual inventory system where the expected amount of inventory on hand at the end of the period is known and can be compared to a physical stock count. (c) When RFIDs are in use a perpetual inventory system would be used. The RFIDs make it easy to track what is coming into and leaving a store. (d) RFIDs would be detectable by a hand held stock counting machine so it would be quick and simple to count how many items were on hand. Counting could be done electronically rather than manually. This may miss items that are missing their RFID or have a faulty one but the error rate is not likely to be material and the reduced time and cost involved would justify the use of electronic counting. (e) The costs of installing and maintaining an RFID system need to be weighed up against the benefits. In the USA stores such as Walmart and Macy’s have significant buying power and can insist on only purchasing from suppliers that use RFIDs, hence they can pass much of the cost back to the suppliers. Ethics and governance Revenue recognition issues A large wholesale business in Melbourne’s northern suburbs has run into difficulties in the past few years due to a fall in demand from retailers for certain product lines. The CEO of the business and other senior managers, including the sales manager, were appointed on the basis that they will be paid bonuses at the end of the financial year depending on the level of profits made by the business. In recent times, these bonuses have been reduced somewhat and the sales manager has had difficulty meeting some of her private financial commitments. Just before the end of the financial year, a large order was received from a retailer for the supply of merchandise. The order was placed on the terms of DDP to the warehouse of the retailer, and hence revenue is to be recognised once the merchandise has been delivered to the retailer. Shipment of the order was not possible until 2 weeks into the new financial year. The sales manager, knowing that the entity’s profits, and her bonus and that of the other managers, would be increased if the sale was recognised in the current financial year, has approached you, the accountant, to make an entry in the current period to recognise the revenue from this order prior to the goods being shipped. Required (a) Who are the stakeholders in this situation? (b) What are the ethical issues involved as a result of the sales manager’s request? (c) If you were the accountant of this organisation, what action (if any) would you take? Why? (a) The stakeholders are: •the sales manager •the accountant •the chief executive officer (CEO) •other senior management •those to whom the sales manager has financial commitments •company shareholders. (b) The issue here is whether it is ethical for management to change normal accounting procedures, such as recognition of revenue when goods reach their destination (DDP to the destination), in order to achieve its own self-interests, e.g. extra bonuses. The sales manager has suggested that the goods are to be treated as being sold even though they are still, legally, the property of the wholesale business. However, is the passing of legal ownership essential in deciding whether revenue should be recognised? Who will be hurt by this variation from normal practice? (c) Alternative actions open to the accountant are: 1. Amend the normal accounting practice of revenue recognition, as suggested by the sales manager, and say nothing, thus condoning the sales manager’s actions. 2. Carry out the action as in 1. above, but advise the CEO of the action taken, and of its implications for bonuses to senior management 3. Do not amend the revenue recognition procedure, and report to the CEO the pressure being placed on the accountant by the sales manager. 4. Do not amend the revenue recognition procedure, but say nothing to the CEO, thus losing the possible respect and friendship of the sales manager. Financial analysis JB Hi-Fi Limited Refer to the consolidated financial statements in the latest financial report of JB Hi-Fi Limited on its website, www.jbhifi.com.au, and answer the following questions. 1. List the subsidiary companies in the JB Hi-Fi Group. 2. What is the value of the group’s sales revenue for the current and previous years? What has been the percentage change in sales revenue for the current year? 3. What is the group’s final profit (after income tax) for the current and previous years? What has been the percentage change in profit (after income tax) for the current year? 4. Compare the percentage change in (2) with the percentage change in (3). What information does this comparison provide? 5. What is the total value of inventories on hand for both current and previous years? What is the percentage change in inventory levels? How does this compare with the percentage change in sales revenue calculated in question (2)? Comment on any differences. 6. Calculate appropriate profitability ratios for the most recent 2 years in order to assess the profit performance of JB Hi-Fi Limited. Solution based on the JB Hi-Fi Limited 30th June 2016 report. 1. See note 20 to the financial statements. JB Hi-Fi Limited’s subsidiaries are: • JB Hi-Fi Group Pty Ltd • JB Hi-Fi (A) Pty Ltd • Clive Anthonys Pty Ltd • Rocket Replacements Pty Ltd • JB Hi-Fi Education Solutions Pty Ltd • JB Hi-Fi Group (NZ) Ltd • JB Hi-Fi NZ Limited. 2. Sales revenue for the JB Hi-Fi Group amounted to $ 3 954 467 000 in 2016 and $3 652 136 000 in 2015, a percentage increase of 8.28% for the current year. 3. Profit for the JB Hi-Fi Group was $152 181 000 in 2016 and $136 511 000 in 2015, a percentage increase of 11.48% for the year! 4. Even though the JB Hi-Fi Group has increased sales by 8.28%, the group has had a percentage increase of 11.48% in profits. This would suggest that while sales have increased the business has managed to keep the increase in expenses lower and so the profits have increased by more than the sales. 5. Inventory levels were $546 437 000 at the end of 2016, and $478 871 000 at the end the financial year in of 2015, a percentage increase of 14.1% for the current year. As sales have increased by 8.28%, the percentage increase in inventory of 14.1% suggests inventory turnover has decreased during the year. 6. 2016 2015 Profit Margin 3.85%% ($152 181 000/$3 954 467 000) 3.74% ($136 511 000/$3 652 136 000) Expenses to Sales ratio (excl. tax) 94.51% ($3 737 174 000/$3 954 467 000) 94.66% ($3 457 235 000/$3 652 136 000) Inventory turnover 6.02 times ($3 089 059 000/ average inventory of $512 654 000) Solution Manual for Accounting John Hoggett, John Medlin, Claire Beattie, Keryn Chalmers, Andreas Hellmann, Jodie Maxfield 9780730344568