Financial Accounting Tools for Business Decision Making 10th Edition Kimmel

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Financial Accounting Tools for Business Decision Making 10th Edition Kimmel Weygandt Mitchell Solution Manual

Chapter Five

Challenge Exercise 1

LO: 2

Information related to Pagnucci Co. is presented below.

• On April 5, purchased merchandise from Mockingbird Company for $20,000 terms 2/10, net/30, FOB

shipping point.

• On April 6 paid freight costs of $500 on merchandise purchased from Mockingbird.
• On April 7, purchased equipment on account for $29,000.
• On April 8, returned damaged merchandise to Mockingbird Company and was granted a $3,000 credit for

returned merchandise.

• On April 15 paid the amount due to Mockingbird Company in full.

Instructions:

(a) Prepare the journal entries to record these transactions on the books of Pagnucci Co. under a perpetual inventory system.(b) On April 20, Pagnucci sold 60% of the goods purchased from Mockingbird. What amount would they record as cost of goods sold?(c) How would the April 6 entry be different if the $500 was paid to ship goods to a customer (rather than for shipping costs for goods purchased)?(d) Assume that Pagnucci Co. paid the balance due to Mockingbird Company on May 4 instead of April 15.Prepare the journal entry to record this payment.

Challenge Exercise 1 – Solution

• (1) April 5 Inventory.............................................................

Accounts Payable.....................................

20,000

20,000

(2) April 6 Inventory.............................................................Cash.........................................................500

500

(3) April 7 Equipment..........................................................Accounts Payable.....................................

29,000

29,000

(4) April 8 Accounts Payable...............................................Inventory...................................................3,000

3,000

(5) April 15 Accounts Payable...............................................

($20,000 – $3,000)

17,000

Inventory................................................... 340 [($20,000 – $3,000) x 2%]

Cash ($17,000 – $340)............................. 16,660 1 / 4

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Challenge Exercise 1 – Solution (Continued)

b) The cost of the goods acquired is $17,160 ($20,000 + $500 - $3,000 - $340). The cost of goods sold would

be $10,296 (60% x $17,160).

c) If the $500 was paid on April 6 to ship goods to a customer, the account debited in the entry would be

Freight-Out or Delivery Expense instead of Inventory. When freight is paid to ship goods to a customer, it is incurred in order to earn revenue in the current period. Therefore, it must be recognized as an expense (Freight-Out or Delivery Expense). On the other hand, when freight is paid to acquire goods, the freight cost should not be expensed until the related goods are sold. Therefore, the freight is debited to Inventory and expensed as part of Cost of Goods Sold when the goods are sold.

d) May 4 Accounts Payable.......................................................... 17,000

Cash..................................................................... 17,000 2 / 4

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Challenge Exercise 2

LO: 2, 3, 4

On September 1, Rhea Office Supply had an inventory of 30 calculators at a cost of $20 each. The company uses a perpetual inventory system. During September, the following transactions occurred.

Sept. 6 Purchased 70 calculators at $22 each from Danny Co. for cash.

• Paid freight of $70 on calculators purchased from Danny Co.

10 Returned 2 calculators to Danny Co. for $46 credit (including freight) because they did not meet specifications.12 Sold 33 calculators (30 costing $20, and 3 costing $23 including freight) for $33 each to Great Big Book Store, terms n/30.14 Granted credit of $33 to Great Big Book Store for the return of one calculator that was not ordered (Cost $23).20 Sold 40 calculators costing $23 for $33 each to Bush’s Card Shop, terms n/30.

Instructions:

a) Journalize the September transactions.

b) What amount would Rhea report as net sales in the September income statement?

c) What amount would Rhea report as gross profit in the September income statement?

Challenge Exercise 2 – Solution a)

Sept. 6 Inventory (70 x $22)..............................................................Cash............................................................................1,540 1,540

• Inventory...............................................................................

Cash............................................................................70

70

10 Accounts Payable..................................................................Inventory......................................................................46

46

12 Accounts Receivable (33 x $33)............................................Sales Revenue............................................................Cost of Goods Sold [(30 x $20) + (3 x $23)]..........................Inventory......................................................................1,089

669

1,089

669

14 Sales Returns and Allowances.............................................Accounts Receivable...................................................Inventory...............................................................................Cost of Goods Sold.....................................................33

23

33

23 3 / 4

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Challenge Exercise 2 – Solution (Continued)

20 Accounts Receivable (40 x $33)........................................... 1,320 Sales...........................................................................1,320 Cost of Goods Sold (40 x $23).............................................. 920

Inventory..................................................................... 920

• ($1,089 + $1,320) - $33 = $2,376
• $2,376 – ($669 + $920 - 23) = $810
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