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Chapter 5: Q30RQ (page 295)
Highlight the differences in the closing process when using the periodic inventory system rather than the perpetual inventory system.
Answer
The perpetual inventory system records the adjusting entries, while the periodic inventory system does not requireadjusting entries.
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What is freight out and how is it recorded by the seller?
Journalize the following sales transactions for Antique Mall. Explanations are not required. The company estimates sales returns at the end of each month.
Jan. 4 Sold \(16,000 of antiques on the account; credit terms are n/30. The cost of goods is \)8,000.
8 Received a \(300 sales return on damaged goods from the customer. The cost of goods damaged is \)150.
13 Antique Mall received payment from the customer on the amount due from Jan. 4, less the return.
20 Sold \(4,900 of antiques on the account; credit terms are 1/10, n/45, FOB destination. The cost of goods is \)2,450.
20 Antique Mall paid $70 on freight out.
29 Received payment from the customer on the amount due from Jan. 20, less the discount.
Clink Electric uses the periodic inventory system. Clink reported the following selected amounts at May 31, 2018:
Merchandise Inventory, June 1, 2017 \( 16,000 Freight In \) 6,000
Merchandise Inventory, May 31, 2018 21,500 Net Sales Revenue 138,000
Purchases 81,000 Common Stock 32,000
Purchase Discounts 3,000 Retained Earnings 17,000
Purchase Returns and Allowances 6,600
Compute the following for Clink:
a. Cost of goods sold.
b. Gross profit.
How is the net cost of inventory calculated?
Party-Time T-Shirts sells T-shirts for parties at the local college. The company completed the first year of operations, and the shareholders are generally pleased with operating results as shown by the following income statement:
PARTY-TIME T-SHIRTS
Income Statement
Year Ended December 31, 2017
Net Sales Revenue \(350,000
Cost of Goods Sold 210,000
Gross Profit 140,000
Operating Expenses:
Selling Expense 40,000
Administrative Expense 25,000
Net Income \)75,000
Bill Hildebrand, the controller, is considering how to expand the business. He proposes two ways to increase profits to \(100,000 during 2018.
a. Hildebrand believes he should advertise more heavily. He believes additional advertising costing \)20,000 will increase net sales by 30% and leave administrative expense unchanged. Assume that Cost of Goods Sold will remain at the same percentage of net sales as in 2017, so if net sales increase in 2018, Cost of Goods Sold will increase proportionately.
b. Hildebrand proposes selling higher-margin merchandise, such as party dresses, in addition to the existing product line. An importer can supply a minimum of 1,000 dresses for \(40 each; Party-Time can mark these dresses up 100% and sell them for \)80. Hildebrand realizes he will have to advertise the new merchandise, and this advertising will cost $5,000. Party-Time can expect to sell only 80% of these dresses during the coming year.
Help Hildebrand determine which plan to pursue. Prepare a multi-step income statement for 2018 to show the expected net income under each plan.
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