ANSWERS TO QUESTIONS

1. (a) The operating cycle is the time it takes to go from cash to cash in producing
revenues.

(b) The normal operating cycle for a merchandising company is likely to be

longer than that of a service company because, in a merchandising
company, inventory must first be purchased and sold, and then the
receivables must be collected whereas, in a service company, the services
only need to be provided (not purchased first and then stored until sold)
and then the receivables must be collected.
LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

2. (a) The income measurement process of a merchandising company is the

same as the service company in that net income is arrived at by deducting
expenses from revenues.

(b) The income measurement process of a merchandising company differs

from that of a service company in that its revenue is derived from sales
revenue, not service revenue. In addition, cost of goods sold is deducted
from sales revenue to determine gross profit, before operating and other
expenses, similar in both types of companies, are deducted (or other
income is added).

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

3. The company needs to compare the cost of the detailed record keeping required
in a perpetual inventory system to the benefits of having the additional
information about the inventory. One of the benefits of a perpetual inventory
system is the ability to answer questions from customers about merchandise
availability. In a used clothing business, this may not be of much benefit unless
each inventory item is unique. Another benefit is the monitoring of inventory
quantities in order to avoid running out of stock. Again, this may not be of benefit
since the company does not order recurring or similar merchandise, and may not
have a supplier to order from. But if the company is selling used clothing on
consignment, it will need to track each item in order to determine which
consignor to pay when an item is sold.

The company should carefully determine the cost of the detailed record keeping
required, in particular for a new company. A perpetual inventory system requires
more record keeping and therefore is more expensive to use. For example, a
perpetual inventory system usually requires an investment in a point-of-sale
system that is integrated with the inventory system.

LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

4. A physical count is an important control feature. By using a perpetual inventory

system, a company knows what should be on hand. Performing a physical count
 and checking it to the perpetual records is necessary to detect any errors in
record keeping and/or shortages in stock.
LO 1 BT: C Difficulty: M Time: 2 min. AACSB: None CPA: cpa-t001 CM: Reporting

5. The key distinction between a periodic inventory system and a perpetual

inventory system is whether or not information on inventory and cost of goods
sold (units and dollars) are always (perpetually) available or only known when
inventory counts are conducted (periodically). Because information on the cost
of goods sold is only known after an inventory count has been carried out under
the periodic system, no entry is made for the cost of goods sold at the time of
each sale. Instead, cost of goods sold is a residual number, determined by
subtracting ending inventory (as determined by the inventory account) from cost
of goods available for sale. This means that any goods not included in ending
inventory are assumed to have been sold. In order to arrive at the cost of goods
available for sale, separate accounts are set up in the general ledger to keep
track of the purchases, freight-in, purchase returns and allowances, and
purchase discounts. Under the periodic inventory system, management is not
able to look up in the general ledger accounts for the balance of inventory at a
particular point in time. In order to arrive at the inventory value, a physical count
of the inventory must be performed.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

6. The reason for recording the purchase of merchandise for resale in a separate
account is to enable a company to determine its cost of goods sold and gross
profit. This information is useful in managing costs and setting prices.

LO 2 BT: C Difficulty: M Time: 2 min. AACSB: None CPA: cpa-t001 CM: Reporting

7. (a) The value of the purchase discount to Butler’s Roofing is $480 ($48,000 ×
1%).
(b) Failing to take advantage of the discount terms is like paying the supplier
an extra $480 in order to settle a $47,520 invoice 20 days later. This works
out to 1.01% [$480 ÷ $47,520] every 20 days. On an annual basis this
amounts to 18.4% [($480 ÷ $47,520 × (365 ÷ 20)]. Butler’s should take
advantage of the cash discount offered.
LO 2 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance
8. Once the inventory on hand has been determined from an inventory count, a
comparison is made with the amount reported by the perpetual inventory
system. Due to shrinkage or theft, or possibly even from accounting errors, there
is likely to be less inventory on hand than as per the accounting records. The
perpetual record must be adjusted to the amount according to the inventory
count and the difference is charged to Cost of Goods Sold.
LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

9. (a) Lebel Ltée should record the sale as revenue in June, when the goods are
sold to a customer. When the merchandise was purchased in April, it
should be recorded as an asset, inventory. It should be recorded as cost of
goods sold (an expense) in June when the inventory is sold and the
revenue is recognized. This is necessary in order to match the cost with the
related revenue
(b) Lebel’s customer should recognize the purchase in June, when the
inventory is received.
LO 2,3 BT: C Difficulty: C Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

10. (a) FOB shipping point means that the goods are placed free on board by the
seller at the point of shipping. The buyer pays the freight costs from the
point of shipping to the buyer’s destination because title passes at shipping
point. FOB destination means the goods are delivered by the seller to their
destination, where the title passes. The seller pays for shipping to the
buyer’s destination.

(b) FOB shipping point will result in a debit to the Inventory account by the
buyer because title has transferred at shipping point and the inventory is
now owned by the buyer. FOB destination will result in a debit to Freight
Out by the seller because they are paying for the freight.

LO 2,3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

11. In a perpetual inventory system, purchase returns are credited to Inventory

because the items purchased have been returned to the vendor and are no
longer available to be sold to customers. Sales returns are recorded to the
account Refund Liability which was increased at the time of recording the sale.
Sales returns are not debited directly to the Sales account because this would
not provide information about the goods returned. This information can be useful
in making decisions. Debiting returns directly to sales may also cause problems
in comparing sales for different periods

LO 2,3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
12. (a) A quantity discount gives a reduction in the price according to the volume
of the purchase. A purchase discount is offered by a seller to a buyer for
early payment of an invoice. When the buyer pays the invoice within the
discount period, the amount of the discount decreases the Inventory
account.

(b) Quantity discounts are not recorded or accounted for separately but
become part of the recorded sales price. Buyers record purchase discounts
taken as a credit to Inventory under the perpetual system or to Purchase
Discounts when using the periodic system.
LO 2,3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

13. A contract may have multiple deliverables for goods or services. These
deliverables lead to multiple separate performance obligations for the seller
under the contract terms. Since not all goods or services may be delivered at the
same time, whenever a performance obligation is satisfied from a partial
delivery, a calculation must be made in order to record the corresponding
revenue earned for that delivery and corresponding satisfaction of the
performance of obligation.
LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

14. A variable consideration is an amount that will reduce the total contract amount
to what is ultimately collected on a contract. Variable consideration includes
expected sales returns and allowances and rebates. It also includes sales
discounts that management expects will be claimed by customers. In the case of
sales returns and allowances, the amount of sales that is recorded is reduced by
the estimated amount that will be returned or for which a sales allowance will be
granted. This amount is recorded to Refund Liability.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

15. Sales discounts are a variable consideration under a sales contract. Sales
discounts reduce the amount of the sales to the amount that is ultimately
collected from customers. At the time of the sale, the amount estimated as a
reduction in the sales price is recorded. If a company considers changing
discount terms from 2/10, n/30 to 1/10, n/30, the amount of sales that will be
recorded at the point of sale will be increased by 1%.
LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
16. Under ASPE, If the merchandise is not resaleable, it cannot be included in
inventory since it cannot be resold and it has no value. The cost remains in cost
of goods sold since it is a cost of doing business. If the merchandise is
resaleable, it still has value to the company. In this case, the cost of the
merchandise is debited to inventory again and cost of goods sold is credited.
Note that under IFRS returned merchandise that is saleable is credited to
Estimated Inventory Returns because the credit to Cost of Goods Sold was done
when the product was originally sold. Merchandise that is not resaleable is not
included in inventory. Cost of Goods Sold is debited and the Estimated Inventory
Returns account is credited.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

17. The sales taxes are collected on behalf of the federal and provincial
governments, and must be periodically remitted to these authorities. Sales taxes
that are collected from selling a product or service are not recorded as revenue,
instead they are recorded as a liability until they are paid to the government.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

18. Unrealized gains and losses that are not included in net income are included in
comprehensive income.
LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

19. In a single-step statement of income, all data are classified into two categories:
(1) revenues and (2) expenses. It is referred to as a single-step statement of
income because only a single step—subtracting expenses from revenues—is
needed to determine income before income tax. A multiple-step statement of
income requires several steps to determine income before income tax. First, cost
of goods sold is deducted from sales to determine gross profit. Operating
expenses are then deducted to calculate income from operations. Finally, other
income and expenses are added or deducted to determine income before
income tax. The deduction of income tax to calculate net income (loss) is the
same under both formats. In addition, both formats produce the same profit
amount for the period.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

20. North West Company uses a multiple-step statement of income.

LO 4 BT: K Difficulty: S Time: 2 min. AACSB: None CPA: cpa-t001 CM: Reporting
21. (a) When classifying expenses by their nature, they are reported in accordance
with their natural classification (for example, salaries, depreciation, and so
on). When classifying expenses by their function, they are reported
according to the activity (business function) for which they were incurred
(for example, cost of goods sold, administrative, selling).

(b) It does not matter whether a single-step or multiple-step statement of

income is prepared, expenses must be classified either by nature or by
function.
LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

22. Because Overwaitea is a private enterprise, it can follow Accounting Standards

for Private Enterprises (ASPE). Companies following ASPE can classify their
expenses in whatever manner is useful to them. Loblaws, which follows IFRS,
must classify its expenses by their nature or their function.
LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

23. Interest expense is a non-operating expense because it relates to how a

company’s operations are financed, not to the company’s main operations.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

24. The difference between gross profit margin and profit margin is that the gross
profit margin measures the amount by which the selling price exceeds the cost
of goods sold while the profit margin measures the extent to which sales cover
all expenses (including the cost of goods sold).

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

25. Factors affecting a company’s gross profit margin include the selling price and
the cost of the merchandise. Recall that gross profit = sales  cost of goods sold.
Selling products with a higher price or “mark-up” or selling products with a lower
cost would result in an increased gross profit margin. Selling products with a
lower price (perhaps due to increased competition that results in lower selling
prices) or selling products with a higher cost (perhaps due to price increases
from suppliers and shippers) would result in a lower gross profit margin.

LO 5 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
26. High gross profit Low gross profit
Computer services and Low-price retail companies such as
software companies Walmart
Pharmaceutical manufacturers Grocery stores
Luxury goods retailers Forestry and wood products
LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

*27.
(a) (b)
Accounts Added/Deducted Normal Balance
Purchase Returns and Allowances Deducted Credit
Purchase Discounts Deducted Credit
Freight In Added Debit

LO 6 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

*28. Periodic System

Cost of Goods Sold = Beginning Inventory + Cost of Goods Purchased
(Purchases – Purchase Discounts – Purchase Returns and Allowances + Freight
In) – Ending Inventory
Ending inventory and cost of goods sold for the period are calculated at the end
of the period.

Perpetual System
Cost of Goods Sold = the cost of the item(s) sold
Cost of goods sold is calculated at the time of each sale and recorded as an
increase (debit) to the Cost of Goods Sold account and a decrease (credit) to the
Inventory account.

LO 6 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
*29. The calculation of cost of goods sold is shown in detail in the statement of
income of a company using the periodic system. In a perpetual system, it is one
line and amount only.

Periodic System

Cost of Goods Sold =

1. Add the cost of goods purchased (where the cost of goods purchased is equal
to purchases less purchases discounts, and purchases returns and
allowances plus freight in) to the cost of goods on hand at the beginning of the
period (beginning inventory). The result is the cost of goods available for sale.

2. Subtract the cost of goods on hand at the end of the period (ending inventory)
from the cost of goods available for sale. The result is the cost of goods sold.

Perpetual System
Cost of Goods Sold = one number, which is the total of cost of goods sold as
previously determined and recorded for all sales.
LO 6 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

*30. Under ASPE, the account that is used for sales returns is Sales Returns. Sales
Returns is a contra revenue account to Sales and is shown immediately after
sales on the statement of income. When deducted from sales we arrive at the
result known as net sales.
LO 7 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

*31. Under ASPE sales discounts are recorded when the supplier offers terms such
as 1/10, n/30 and the buyer takes advantage of these terms to pay within the
discount period, which in this case is 10 days from the invoice date. When paid
within the discount period, 1% of the invoice amount is recorded to the account
Sales Discount which is a contra revenue account to Sales and is shown
immediately after sales on the statement of income. When deducted from sales
we arrive at the result known as net sales.

LO 7 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 5.1
a. The company with the most efficient operating cycle is Company A as it uses the
fewest number of days in its cycle to obtain cash.

b. The company which is most likely a service company is Company A as it does

not have to manufacture or deliver inventory and consequently takes the fewest
number of days to obtain cash. Company C, with the highest number of days in
its operating cycle, is likely the manufacturing company, and the merchandising
company would be in the middle (Company B), with neither the highest nor the
lowest number of days in its operating cycle.

LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5.2

a. [1] Income before tax = $100 – $65 = $35

[2] Net income = $35 (from [1]) – $9 = $26

[3] Cost of goods sold = $100 – $60 = $40

[4] Operating expenses = $60 – $35 = $25

[5] Income tax expense = $35 – $26 = $9

b. Company A is the service company, since it has no cost of goods sold.

Company B is the merchandising company, since it has cost of goods sold.

LO 1 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 5.3
a.
Inventory
Beginning Balance 55,000
Purchases 220,000
26,000 Purchase returns
9,700 Purchase discounts
Freight in 2,700
218,00
0 Cost of goods sold
Ending Balance 24,000

Although not required, the following are the journal entries of the transactions.

Purchases Inventory................................................................... 220,000

Accounts Payable............................................... 220,000

Purchase Accounts Payable..................................................... 26,000

Returns Inventory............................................................. 26,000

Purchase Accounts Payable ($220,000 – $26,000).................. 194,000

Discounts Inventory ($194,000 × 5%).................................. 9,700
Cash.................................................................... 184,300

Freight In Inventory................................................................... 2,700

Accounts Payable............................................... 2,700

Cost of Cost of Goods Sold.................................................. 218,000

Sales Inventory............................................................. 218,000

b.
Cost of Goods Sold.................................................. 2,000
Inventory ($24,000 - $22,000)............................. 2,000

LO 2 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 5.4
Pocras Corporation (Buyer):
Aug. 24 Inventory ................................................................. 32,000
Accounts Payable............................................... 32,000

Wydell Inc. (Seller):

Aug. 24 Accounts Receivable................................................ 32,000
Sales................................................................... 32,000

24 Cost of Goods Sold.................................................. 14,400

Inventory............................................................. 14,400

LO 2,3 BT: AP Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5.5

Jan. 2 Inventory ................................................................. 45,000
Accounts Payable............................................... 45,000

5 No entry necessary – Freight costs paid by Fundy Corp.

6 Accounts Payable..................................................... 6,000

Inventory............................................................. 6,000

11 Accounts Payable ($45,000 - $6,000)...................... 39,000

Cash.................................................................... 39,000

LO 2 BT: AP Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 5.6

Jan. 2 Accounts Receivable................................................ 45,000

Refund Liability ($45,000 x 15%)........................ 6,750
Sales................................................................... 38,250

2 Cost of Goods Sold.................................................. 21,420

Estimated Inventory Returns ($25,200 x 15%)......... 3,780
Inventory............................................................. 25,200

5 Freight Out................................................................ 900

Cash.................................................................... 900

6 Refund Liability ........................................................ 6,000

Accounts Receivable........................................... 6,000

6 Inventory................................................................... 3,360
Estimated Inventory Returns .............................. 3,360

11 Cash......................................................................... 39,000
Accounts Receivable ($45,000 - $6,000)............ 39,000
LO 3 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 5.7

Allocate the transaction price in proportion of the stand-alone selling prices:

Stand-alone
Selling price
Excavator $220,000 ($220,000 ÷ $250,000 = 88%)
Grapple bucket 30,000 ($30,000 ÷ $250,000 = 12%)
Total $250,000

Allocated
Selling price
Excavator sale $202,400 ($230,000 x 88%)
Accessory sale 27,600 ($230,000 x 12%)
Total $230,000
LO 3 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 5.8

a. Sales ......................................................................... $1,070,000

Less: Cost of goods sold............................................ 658,000
Gross profit................................................................. $ 412,000

b. Gross profit................................................................. $412,000

Less: Administrative expenses.................................. $160,000
Selling expenses.............................................. 110,000 270,000
Income from operations.............................................. $142,000

c. Income from operations.............................................. $142,000

Add: Other income.................................................... $26,000
Less: Other expenses................................................ (35,000) _ (9,000
Income before income tax........................................... $133,000

d. Income before income tax........................................... $133,000

Less: Income tax expense......................................... 27,000
Net income ................................................................. $106,000

LO 4 BT: AP Difficulty: S Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5.9

As the name suggests, numerous steps are required in determining net income in a
multiple-step statement.
a. b.
Item Single-Step Multiple-Step

Depreciation expense Expenses Operating expenses

Cost of goods sold Expenses Cost of goods sold
Freight out Expenses Operating expenses
Income tax expense Income tax expense Income tax expense
Interest expense Expenses Other income and expenses
Interest income Revenues Other income and expenses
Rent income Revenues Other income and expenses
Salaries expense Expenses Operating expenses
Sales Revenues Sales

LO 4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 5.10
a.
KAI CORPORATION
Statement of Income (Single-Step)
Year Ended December 31, 2021

Revenues
Sales.......................................................................... $3,980,000
Expenses
Cost of goods sold..................................................... $1,925,000
Salaries expense........................................................ 921,000
Depreciation expense................................................ 278,000
Insurance expense..................................................... 128,000 3,252,000
Income before income tax............................................... 728,000
Income tax expense 132,000
Net income $ 596,000

b.
KAI CORPORATION
Statement of Income (Multiple-Step)
Year Ended December 31, 2021

Sales......................................................................................................... $3,980,000
Cost of goods sold.................................................................................... 1,925,000
Gross profit............................................................................................... 2,055,000
Operating expenses
Salaries expense.......................................................... $921,000
Depreciation expense................................................... 278,000
Insurance expense....................................................... 128,000
Total operating expenses............................................................... 1,327,000
Income before income tax......................................................................... 728,000
Income tax expense.................................................................................. 132,000
Net income................................................................................................ $ 596,000

(Revenues – Cost of goods sold – Operating expenses = Income from operations)

LO 4 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 5.11

a. The company is using a multiple-step form of statement of income.

b. The company is classifying its expenses by their function. They are reported
according to the activity (business function) for which they were incurred (for
example, cost of goods sold, administrative, selling).

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 5.12

a.
2021 2020
Sales $250,000 $200,000
Cost of goods sold 137,500 114,000
Gross profit 112,500 86,000
Operating expenses 50,000 40,000
Income from operations 62,500 46,000
Other income ______ 10,000
Income before income taxes 62,500 56,000
Income tax expense 20,000 15,000
Net income $42,500 $41,000

b.
2021 2020

Gross profit $112,500 45.0 $86,000

margin = = 43.0%
$250,000 % $200,000

Profit
$42,500 17.0 $41,000
margin = = 20.5%
$250,000 %
$200,000

c. Modder Corporation’s gross profit margin increased in 2021 indicating an

increase in the percentage mark-up, or a reduction in the cost of goods sold, or
both. On the other hand, in 2021, the company’s profit margin dropped. The
decrease in profit margin is caused by other income in 2020 that was not
available in 2021. Operating expenses were 20% of sales in both years. The
income tax rate also increased in 2021 (32% vs 26.8%).

LO 4,5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 and : cpa-t005CM: Reporting and
Finance
BRIEF EXERCISE 5.13

a.
($ in millions) 2018 2017

Gross profit = =
$4,711.3 $4,480.2
$14,058.7 – $9,347.4 $13,276.7 – $8,796.5

($ in millions) 2018 2017

Gross profit $4,711.3 $4,480.2

margin = 33.5% = 33.7%
$14,058.7 $13,276.7

Profit $783.0 $818.8

= 5.6% = 6.2%
margin $14,058.7 $13,276.7

b. Canadian Tire Corporation’s gross profit margin decreased in 2018. Although

sales increased 5.9%, [($14,058.7 - $13,276.7) ÷ $13,276.7] cost of goods sold
increased 6.3% [($9,347.4 - $8,796.5) ÷ $8,796.5] which lead to the decreased
gross profit margin. The profit margin also decreased in 2018. Operating
expenses or interest or income tax expense must have increased as a
percentage of sales.
LO 4,5 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005 CM: Reporting and
Finance

*BRIEF EXERCISE 5.14

Jan. 2 Purchases................................................................. 45,000

Accounts Payable............................................... 45,000

5 No entry necessary - Freight costs paid by Fundy Corp.

6 Accounts Payable..................................................... 6,000

Purchase Returns and Allowances..................... 6,000

11 Accounts Payable ($45,000 - $6,000)...................... 39,000

Cash ................................................................. 39,000
LO 6 BT: AP Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
*BRIEF EXERCISE 5.15
Jan. 2 Accounts Receivable................................................ 45,000
Refund Liability ($45,000 x 15%)........................ 6,750
Sales................................................................... 38,250

2 No cost of goods sold entry at time of sale

5 Freight Out................................................................ 900

Cash.................................................................... 900

6 Refund Liability......................................................... 6,000

Accounts Receivable........................................... 6,000

6 No cost of goods sold entry at the time of sale

11 Cash......................................................................... 39,000
Accounts Receivable ($45,000 - $6,000)............ 39,000
LO 6 BT: AP Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
*BRIEF EXERCISE 5.16

a. Purchases..................................................................... $880,000
Less: Purchase returns and allowances...................... $13,000
Purchase discounts............................................ 14,000 27,000
Net purchases............................................................... $853,000

b. Net purchases............................................................... $853,000

Add: Freight in............................................................ 16,000
Cost of goods purchased.............................................. $869,000

c. Beginning inventory....................................................... $ 96,000

Add: Cost of goods purchased.................................... 869,000
Cost of goods available for sale.................................... 965,000
Less: Ending inventory................................................. 82,000
Cost of goods sold........................................................ $883,000

d. Sales ........................................................................... $1,708,000

Less: Cost of goods sold............................................... 883,000
Gross profit.................................................................... $825,000
LO 6 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
*BRIEF EXERCISE 5.17
a. Cost of goods sold
Beginning inventory............................................ $105,000
Purchases........................................................... $195,000
Less: Purchase returns and allowances............. $ 6,600
Purchase discounts................................... 20,400 27,000
Net purchases.................................................... 168,000
Add: Freight In.................................................... 5,250
Cost of goods purchased.................................... 173,250
Cost of goods available for sale.......................... 278,250
Ending inventory................................................. 120,000
Cost of goods sold.............................................. $158,250

b. There would be no difference in the remainder of the statement of income for

Halifax Limited whether the periodic or perpetual inventory systems were used.

Purchases – Purchase returns and allowances – Purchase discounts + Freight-in = Cost

of goods purchased

(Beginning inventory + Cost of goods purchased – Ending inventory = Cost of goods

sold)

LO 6 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
*BRIEF EXERCISE 5.18
Dec. 31 Inventory (ending)..................................................... 68,000
Cost of Goods Sold.................................................. 401,000*
Purchase Discounts.................................................. 6,000
Inventory (beginning).......................................... 75,000
Purchases........................................................... 388,000
Freight In............................................................. 12,000

* Cost of goods sold = Beginning inventory + Purchases  Purchase

discounts  Purchase returns and allowances + Freight in – Ending
inventory
Cost of goods sold = $75,000 + $388,000  $6,000 + $12,000 – $68,000 =
$401,000
LO 6 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*BRIEF EXERCISE 5.19

EDSON LTD.
Statement of Income (Multiple-Step)
Year Ended December 31, 2021

Sales......................................................................................................... $935,000
Less: Sales returns........................................................... $8,000
Sales discounts....................................................... 7,000 15,000
Net sales................................................................................................... 920,000
Cost of goods sold.................................................................................... 380,000
Gross profit............................................................................................... 540,000
Operating expenses
Salaries expense.......................................................... $220,000
Depreciation expense................................................... 20,000
Total operating expenses............................................................... 240,000
Income from operations............................................................................ 300,000
Other income and expenses
Interest expense.................................................................................. 10,000
Income before income tax......................................................................... 290,000
Income tax expense.................................................................................. 87,000
Net income................................................................................................ $203,000

(Revenues – Contra revenues – Cost of goods sold – Operating expenses = Income from
operations)

LO 7 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
EXERCISE 5.7

a. Dec. 3 Accounts Receivable........................................... 68,000

Refund Liability ($68,000 x 3%)..................... 2,040
Sales.............................................................. 65,960

3 Cost of Goods Sold............................................. 34,920

Estimated Inventory Returns ($36,000 x 3%)...... 1,080
Inventory........................................................ 36,000

7 No entry necessary.

8 Refund Liability.................................................... 2,100

Accounts Receivable..................................... 2,100

Inventory............................................................. 1,150
Estimated Inventory Returns.......................... 1,150

11 Cash.................................................................... 65,900
Accounts Receivable ($68,000 – $2,100)...... 65,900

b. Dec. 3 Inventory............................................................. 68,000

Accounts Payable.......................................... 68,000

7 Inventory............................................................. 900
Cash.............................................................. 900

8 Accounts Payable............................................... 2,100

Inventory........................................................ 2,100

11 Accounts Payable ($68,000 – $2,100)................ 65,900

Cash.............................................................. 65,900

c. Sales................................................................................... $65,960
Cost of goods sold............................................................... 34,920
Gross profit.......................................................................... $31,040

LO 2,3,4 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
EXERCISE 5.9
a. Sales $2,624,000
Cost of goods sold 1,114,000
Gross profit $1,510,000

b. Expenses:
Advertising expense $112,000
Depreciation expense 188,000
Income tax expense 61,000
Interest expense 117,000
Salaries expense 776,000 1,254,000
Net income $ 256,000

c. Current assets:
Accounts receivable $187,000
Cash 71,000
Inventory 232,000
Prepaid expenses 29,000
Total current assets $519,000

Current liabilities:
Accounts payable $134,000
Deferred revenue 32,000
Property tax payable 18,000
Refund liability 21,000
Salaries payable 26,000
Total current liabilities $231,000

d. We know that Swirsky Corporation is in the first year of operations because there was no
Retained Earnings balance.

LO 4 BT: AP Difficulty: S Time: 20 min. AACSB: Analytic CPA:cpa-t001 CM: Reporting

*EXERCISE 5.17
[1] $1,420 = ($1,500 – $50 – $30) [10]$7,560 = ($7,210 + $150 + $200)
[2] $1,550 = ($1,420 + $130) [11] $590 = ($7,800 – $7,210)
[3] $1,750 = ($1,550 + $200) [12]$8,800 = ($1,000 + $7,800)
[4] $270 = ($1,750 – $1,480) [13]$7,550 = ($8,800 [12]) – $1,250)
[5] $270 = [4] (same as ending, Yr 1) [14]$1,250 = given (same as ending, Yr 1)
[6] $1,950 = ($100 + $50 + $1,800) [15]$8,050 = ($8,550 – $400 – $100)
[7] $230 = ($2,030 [8] – $1,800) [16]$8,600 = ($8,050 [15] + $550)
[8] $2,030 = ($2,300 – $270 [5]) [17] $9,850 = ($1,250 [14] + $8,600 [16])
[9] $1,950 = ($2,300 – $350) [18] $8,350 = ($9,850 [17] – $1,500)

LO 6 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
EXERCISE 5.18
a.
LIVELY LIMITED
Statement of Income
Year Ended February 28, 2021

Sales $392,600
Cost of goods sold
Inventory, beginning $ 54,600
Purchases $273,000
Less: Purchase discounts 39,000
Purchase returns and allowances 20,800
Net purchases 213,200
Add: Freight in 8,450
Cost of goods purchased 221,650
Cost of goods available for sale 276,250
Less: Inventory, ending 79,300
Cost of goods sold 196,950
Gross profit 195,650
Operating expenses
Administrative expenses $120,900
Selling expenses 9,100
Total operating expenses 130,000
Income from operations 65,650
Other income and expenses
Interest expense 7,800
Income before income tax 57,850
Income tax expense 9,300
Net income $ 48,550

(Beginning inventory + Net purchases + Freight-in = Cost of goods available for sale)

b.

Feb. 28 Inventory (ending)..................................................... 79,300

Cost of Goods Sold.................................................. 196,950
Purchase Returns and Allowances........................... 20,800
Purchase Discounts.................................................. 39,000
Inventory (beginning).......................................... 54,600
Purchases........................................................... 273,000
Freight In............................................................. 8,450
LO 6 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
 PROBLEM 5.3A

a.
Sept. 2 Equipment............................................................ 65,000
Accounts Payable...................................... 65,000

3 No entry necessary.

4 Supplies................................................................ 4,000
Cash.......................................................... 4,000

6 Inventory............................................................... 65,000
Accounts Payable...................................... 65,000

7 Inventory............................................................... 1,600
Cash.......................................................... 1,600

8 Accounts Payable................................................. 5,000

Inventory.................................................... 5,000

9 Accounts Receivable............................................ 20,000

Refund Liability ($20,000 x 5%)................. 1,000
Sales.......................................................... 19,000

Cost of Goods Sold.............................................. 14,250

Estimated Inventory Returns ($15,000 x 5%)....... 750
Inventory.................................................... 15,000

10 Freight Out............................................................ 375

Cash..........................................................

17 Cash ..................................................................... 20,000

Accounts Receivable................................... 20,000

20 Accounts Payable ($65,000 – $5,000).................... 60,000

Cash ($60,000 – $600)................................ 59,400
Inventory ($60,000 × 1%)............................ 600
PROBLEM 5.3A (CONTINUED)

a. (continued)

Sept. 21 Inventory................................................................. 6,000

Cash............................................................ 6,000

22 Accounts Receivable.............................................. 27,000

Refund Liability ($27,000 x 5%)................. 1,350
Sales............................................................ 25,650

Cost of Goods Sold................................................. 19,000

Estimated Inventory Returns ($20,000 x 5%)....... 1,000
Inventory...................................................... 20,000

23 No entry necessary.

28 Refund Liability....................................................... 1,000

Accounts Receivable................................... 1,000

Inventory................................................................. 750
Estimated Inventory Returns........................

b. and c.
Sales Cost of Goods Sold Gross profit As a %
Sept. 9 $19,000 $14,250
Sept. 22 25,650 19,000
Total $44,650 $33,250 $11,400 25.5%

LO 2,3,4,5 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and
Finance
 PROBLEM 5.7A

a. Allocate the transaction price in proportion of the stand-alone selling prices:

Stand-alone
Selling price
Trucks (15 x $80,000) $1,200,000 ($1,200,000 ÷ $1,500,000 = 80%)
Campers (15 x $20,000) 300,000 ($300,000 ÷ $1,500,000 = 20%)
Total $1,500,000

Allocated
Selling price
Trucks $1,080,000 ($1,350,000 x 80%)
Campers 270,000 ($1,350,000 x 20%)
Total $1,350,000

The amount of revenue that can be recognized in May when all trucks are delivered is
$1,080,000
The amount of cost of goods sold is (15 x $68,000) $1,020,000

b.
May 5 Accounts Receivable...........................................1,080,000
Sales.............................................................. 1,080,000

5 Cost of Goods Sold.............................................1,020,000

Inventory........................................................ 1,020,000

25 Cash....................................................................1,000,000
Accounts Receivable..................................... 1,000,000

LO 3 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting