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SOLUTIONS TO PROBLEMS

PROBLEM 5.1A

a. A company’s operating cycle is the average time it takes to go from cash to cash in
producing revenues. The operating cycle for a merchandising company covers
the period of time between when you purchase your inventory, to when you sell
it, and to when you eventually collect the accounts receivable from a sale.

The hair salon is having problems paying for its products because it purchases
a two-month supply, paying for it immediately, with cash flow from the current
month’s operations. There is an insufficient cash float available to purchase two
months of supply at one time, and to pay immediately rather than taking
advantage of the 30-day payment period.

The hair salon’s inventory is contributing to the problem of reduced cash flow
and gross profit because some items have been in stock for a long period of
time. This further extends the operating cycle for those items.

b. The physical inventory count comparison with the perpetual inventory record
has flagged discrepancies. There is an issue concerning the way in which the
perpetual record is being maintained and updated because staff members
sometimes forget to scan the products that they use on customers. There may
also be a possibility that goods are being stolen by customers or employees.
Accounting errors could also be the source of the discrepancy, in which case
the company’s procedures should be reviewed, and if necessary, internal
controls should be strengthened. Possible solutions could be having the system
require that items be scanned before a product sale can be rung in. In addition,
the procedures taken to perform the physical inventory count should be
reviewed to determine if the count is the source of the discrepancies. The count
should be performed more frequently, not necessarily for all inventory items but
particularly for those items that had discrepancies from the count performed at
the end of six months. The results of the more frequent counts should be
monitored to see if the discrepancies with the perpetual inventory records are
diminishing.

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PROBLEM 5.1A (CONTINUED)

b. (continued)

The hair salon should use the perpetual inventory system to help determine
which inventory items are out-of-stock and which items are taking a long time to
sell. By managing what inventory is purchased, fewer markdowns of the selling
price will be required, and sales should increase as there will be less chance for
a stock-out. Finally, the full 30 days should be taken on the terms with your
supplier, in order to have more cash on hand when needed.

c. For control reasons, a physical inventory count must always be taken at least
once a year, and ideally more often under the perpetual inventory system. By
using a perpetual inventory system, a company knows what inventory 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. The
staff may be forgetting to scan intentionally. Enforcing the scanning procedure
will strengthen internal control over cash receipts. If staff can avoid scanning
product, they may also attempt to avoid recording a cash sale altogether,
pocketing the extra cash. This theft would lead to unrecorded revenues and
would reduce the gross profit performance of the salon.

d. Data analytics could assist Karen in determining the sales trends of those
products that are the most popular with customers that often cause stock-outs
and those products that are not selling well and may need to be written down.
Seasonal trends might be detected using data analytics along with statistics of
which price point is most popular when selling jewellery. With the information in
hand, Karen can buy products more efficiently and possibly at a lower cost.
Reduced stock-outs will lead to increased sales.

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PROBLEM 5.2A

a. Pastolio Ltd. is a wholesaler. Its suppliers are manufactures (olive oil producers)
and its customers are grocery stores and restaurants.
b.
Nov. 2 Accounts Receivable (100 × $28)............................. 2,800
Refund Liability ($2,800 x 6%).......................
Sales.............................................................. 2,632

Cost of Goods Sold................................................... 1,222

Estimated Inventory Returns ($1,300 x 6%)............. 78
Inventory (100 × $13)..................................... 1,300

4 Inventory (200 × $11)................................................ 2,200

Accounts Payable ........................................ 2,200

8 Inventory (200 × $12)................................................ 2,400

Accounts Payable.......................................... 2,400

10 Refund Liability......................................................... 140

Accounts Receivable (5 × $28)......................... 140

Inventory (5 × $13).................................................... 65
Estimated Inventory Returns............................ 65

13 Accounts Payable..................................................... 120

Inventory (10 × $12).......................................

14 Accounts Receivable (30 × $40)............................... 1,200

Refund Liability ($1,200 x 6%).......................
Sales.............................................................. 1,128

Cost of Goods Sold................................................... 338

Estimated Inventory Returns ($360 x 6%)................ 22
Inventory (30 × $12).......................................

16 Refund Liability......................................................... 112

Accounts Receivable (4 × $28)......................

Cost of Goods Sold (4 x $13)................................... 52

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

18 Cash ....................................................................... 2,548

Accounts Receivable ($2,800 - $140 -$112) . 2,548

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PROBLEM 5.2A (CONTINUED)

b. (continued)

Nov 24 Accounts Payable ($2,400 – $120) ......................... 2,280

Cash ............................................................. 2,280

26 Cash ......................................................................... 1,200

Accounts Receivable ($40 x 30) ................... 1,200

30 Accounts Receivable (45 × $25)............................... 1,125

Refund Liability ($1,125 x 6%).......................... 68
Sales................................................................. 1,057

Cost of Goods Sold (45 × $12)................................. 508

Estimated Inventory Returns ($540 x 6%)................ 32
Inventory........................................................... 540

c.
Inventory
Oct 31* 1,950 Nov 2 1,300
Nov 4 2,200 13 120
8 2,400 14 360
10 65 540
30
Nov 30 Bal. 4,295
* (150 × $13)

d.
June 30 Cost of Goods Sold................................................... 120
Inventory ($4,295 - $4,175).............................. 120

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PROBLEM 5.3A

a.
Aug. 1 Supplies................................................................ 2,500
Cash..........................................................

3 Inventory............................................................... 35,000
Accounts Payable...................................... 35,000

4 Inventory............................................................... 1,200
Cash..........................................................

6 Accounts Receivable............................................ 25,000

Refund Liability ($25,000 x 12%)...............
Sales.......................................................... 22,000

Cost of Goods Sold.............................................. 8,800

Estimated Inventory Returns ($10,000 x 12%)..... 1,200
Inventory.................................................... 10,000

7 Freight Out............................................................ 500

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

9 Accounts Payable................................................. 3,000

Inventory....................................................

10 Equipment............................................................ 45,000
Accounts Payable...................................... 45,000

11 No entry necessary.

13 Inventory................................................................. 3,000
Cash............................................................ 3,000

15 Cash ................................................................... 25,000

Accounts Receivable................................... 25,000

22 Accounts Payable ($35,000 – $3,000).................... 32,000

Cash ($32,000 – $640)................................ 31,360
Inventory ($32,000 × 2%)............................ 640

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PROBLEM 5.3A (CONTINUED)

a. (continued)

Aug. 26 Accounts Receivable.............................................. 30,000

Refund Liability ($30,000 x 12%)...............
Sales............................................................ 26,400

Cost of Goods Sold................................................. 13,200

Estimated Inventory Returns ($15,000 x 12%)..... 1,800
Inventory...................................................... 15,000

27 No entry necessary

30 Refund Liability....................................................... 1,200

Accounts Receivable...................................

Inventory................................................................. 650
Estimated Inventory Returns........................

b. and c.
Sales Cost of Goods Sold Gross profit As a %
Aug. 6 $22,000 $8,800
Aug. 26 26,400 13,200
Total $48,400 $22,000 $26,400 54.5%

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PROBLEM 5.4A

a.

Oct. 3 Inventory.................................................................. 7,800

Accounts Payable............................................ 7,800

4 Inventory.................................................................. 476
Cash................................................................ 476

9 Inventory.................................................................. 2,700
Accounts Payable............................................ 2,700

12 Accounts Payable..................................................... 300

Inventory......................................................... 300

14 Accounts Receivable................................................ 12,000

Refund Liability ($12,000 x 1%)...................... 120
Sales............................................................... 11,880

Cost of Goods Sold.................................................. 4,653

Estimated Inventory Returns ($4,700 x 1%)............. 47
Inventory......................................................... 4,700

16 Cash ........................................................................ 5,479

Accounts Receivable....................................... 5,479

17 Accounts Payable ($7,800 – $300).......................... 7,500

Inventory ($7,500 × 3%).................................. 225
Cash ($7,500 – $225)...................................... 7,275

26 Accounts Receivable................................................ 13,300

Refund Liability ($13,300 x 1%)...................... 133
Sales............................................................... 13,167

Cost of Goods Sold.................................................. 8,217

Estimated Inventory Returns ($8,300 x 1%)............. 83
Inventory......................................................... 8,300

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PROBLEM 5.4A (CONTINUED)

28 Accounts Payable..................................................... 400

Inventory......................................................... 400

29 Accounts Payable ($2,700 – $400).......................... 2,300

Inventory ($2,300 × 1%).................................. 23
Cash ($2,300 – $23)........................................ 2,277

31 Cash ........................................................................ 8,945

Accounts Receivable....................................... 8,945

b.
Cash Accounts Payable
Oct. 1 Bal. 6,300 Oct. 4 476 Oct. 12 300 Oct. 3 7,800
Oct. 16 5,479 Oct. 17 7,275 Oct. 17 7,500 Oct. 9 2,700
Oct. 31 8,945 Oct. 29 2,277 Oct. 28 400
Oct. 31 Bal. 10,696 Oct. 29 2,300
Oct. 31 Bal. 0
Accounts Receivable
Oct. 1 Bal 14,424 Oct. 16 5,479 Refund Liability
Oct. 14 12,000 Oct. 14 120
Oct. 26 13,300 Oct. 31 8,945 Oct. 26 133
Oct.31 Bal. 253
Oct. 31 Bal. 25,300
Sales
Inventory Oct. 14 11,880
Oct. 1 Bal. 22,500 Oct. 12 300 Oct. 26 13,167
Oct. 3 7,800 Oct. 14 4,700 Oct. 31 Bal. 25,047
Oct. 4 476 Oct. 17 225
Oct. 9 2,700 Oct. 26 8,300 Cost of Goods Sold
Oct. 28 400 Oct. 14 4,653
Oct. 29 23 Oct. 26 8,217
Oct. 31 Bal. 19,528 Oct. 31 Bal. 12,870

Estimated Inventory Returns Retained Earnings

Oct. 14 47 Oct. 1 Bal. 29,224
Oct. 26 83 Oct. 31 Bal. 29,224
Oct. 31 Bal. 130

Common Shares
Oct. 1 Bal. 14,000
Oct. 31 Bal. 14,000

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PROBLEM 5.4A (CONTINUED)

c.
ALPINE SNOWBOARD SHOP LIMITED
Trial Balance
October 31, 2024

Debit
Cash.................................................................................. $ 10,696
Accounts receivable........................................................... 25,300
Inventory............................................................................ 19,528
Estimated inventory returns............................................... 130
Refund liability...................................................................
253
Common shares.................................................................
................................................................................14,000
Retained earnings..............................................................
................................................................................29,224
Sales..................................................................................
................................................................................25,047
Cost of goods sold............................................................. 12,870
............................................................................._______
$68,524
$68,524

(Total debit account balances = Total credit account balances)

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PROBLEM 5.5A

a.

July 2 Accounts Receivable................................................ 4,500

Refund Liability ($4,500 x 3%)........................ 135
Sales............................................................... 4,365

Cost of Goods Sold..................................................

2,910
Estimated Inventory Returns (3,000 x 3%)............... 90
Inventory......................................................... 3,000

2 Freight Out...............................................................100
Cash................................................................ 100
4 Inventory..................................................................
7,000
Accounts Payable............................................ 7,000

5 Inventory..................................................................250
Cash 250

8 Cash ........................................................................
1,500
Accounts Receivable....................................... 1,500

9 Refund Liability......................................................... 90
Cash................................................................ 90

Inventory.................................................................. 30
Estimated Inventory Returns........................... 30

11 Accounts Payable.....................................................400
Inventory......................................................... 400

13 Cash ........................................................................
3,500
Refund Liability ($3,500 x 3%)........................ 105
Sales............................................................... 3,395

Cost of Goods Sold..................................................970

Estimated Inventory Returns ($1,000 x 3%)............. 30
Inventory......................................................... 1,000

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PROBLEM 5.5A (CONTINUED)

a. (continued)

July 16 Inventory..................................................................
6,000
Accounts Payable............................................ 6,000

17 No entry required (freight paid by Virtual

Trainers)

18 Accounts Payable ($7,000 – $400).......................... 6,600

Cash................................................................ 6,600

27 Cash ........................................................................
4,500
Accounts Receivable....................................... 4,500

30 Supplies...................................................................700
Cash................................................................ 700

31 Cost of Goods Sold..................................................380

Inventory......................................................... 380
($14,380* – $14,000 = $380 shortage)

* Unadjusted balance in Inventory account: $5,500 - $3,000 + $7,000 + $250 +

$30 – $400 – $1,000 + $6,000 = $14,380

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PROBLEM 5.5A (CONTINUED)

b.
Cash
July 1 Bal. 10,000 July 2 100 Common Shares
July 8 1,500 July 5 250 July 1 Bal. 9,000
July 13 3,500 July 9 90 Jul 31 Bal. 9,000
July 27 4,500 July 18 6,600
July 30 700
July 31 Bal. 11,760 Retained Earnings
July 1 Bal. 11,000
Accounts Receivable Jul 31 Bal. 11,000
July 1 Bal. 4,500 July 8 1,500
July 2 4,500 July 27 4,500 Sales
July 31 Bal. 3,000 July 2 4,365
July 13 3,395
Inventory July 31 Bal. 7,760
July 1 Bal. 5,500 July 2 3,000
July 4 7,000 July 11 400 Freight Out
July 5 250 July 13 1,000 July 2 100
July 9 30 July 31 Bal. 100
July 16 6,000 July 31
380 Cost of Goods Sold
July 31 Bal. 14,000 July 2 2,910
July 13 970
Estimated Inventory Returns July 31 380
July 2 90 July 9 July 31 Bal. 4,260
July 13 30
July 31 Bal. 90

Supplies
July 30 700
July 31 Bal. 700

Accounts Payable
July 11 400 July 4 7,000
July 18 6,600 July 16 6,000
July 31 Bal. 6,000

Refund Liability
July 9 90 July 2 135
July 13 105
July 31 Bal. 150

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PROBLEM 5.5A (CONTINUED)

c.
SMART HOME ELECTRONICS CORP.
Statement of Income (Partial)
Month Ended July 31, 2024

Sales ........................................................................... $7,760

Cost of goods sold........................................................ 4,260
Gross profit.................................................................... $ 3,500

d.
SMART HOME ELECTRONICS CORP.
Statement of Financial Position (Partial)
July 31, 2024

Assets
Current assets
Cash................................................................... $11,760
Accounts receivable........................................... 3,000
Inventory............................................................. 14,000
Estimated inventory returns................................ 90
Supplies.............................................................. 700
Total current assets................................. $29,550

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PROBLEM 5.6A

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

Stand-alone
Selling price
Riding mowers (4 x $12,000) $48,000 ($48,000 ÷ $64,000 = 75%)
Push lawnmowers (20 x $800) 16,000 ($16,000 ÷ $64,000 = 25%)
Total $64,000

Allocated
Selling price
Riding mowers $45,000 ($60,000 x 75%)
Push lawnmowers 15,000 ($60,000 x 25%)
Total $60,000

The amount of revenue that can be recognized in April when 4 riding mowers and 14
lawnmowers
are delivered:
Riding mowers $45,000
Push lawnmowers (14/20 x $15,000) 10,500
Total sales $55,500

Cost of goods sold:

Riding mowers (4 x $8,300) $33,200
Push lawnmowers (14 x $525) 7,350
Total cost of goods sold $40,550
b.
April 26 Accounts Receivable........................................... 55,500
Sales.............................................................. 55,500

26 Cost of Goods Sold............................................. 40,550

Inventory........................................................ 40,550

May 5 Accounts Receivable ($15,000 - $10,500).......... 4,500

Sales.............................................................. 4,500

5 Cost of Goods Sold (6 x $525)............................ 3,150

Inventory........................................................ 3,150

May 18 Cash.................................................................... 60,000

Accounts Receivable..................................... 60,000
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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

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PROBLEM 5.8A

a.
CLUB CANADA WHOLESALE INC.
Statement of Income (Single-step)
Year Ended December 31, 2024

Revenues
Sales......................................................................................... $1,061,375
Interest income........................................................................ 2,400
$1,063,775
Expenses
Cost of goods sold................................................................... $806,240
Administrative expenses.......................................................... 88,515
Selling expenses...................................................................... 42,100
Interest expense...................................................................... 12,350
949,205
Income before income tax........................................................... 114,570
Income tax expense.................................................................... 17,200
Net income.................................................................................. $ 97,370

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PROBLEM 5.8A (CONTINUED)

b.
CLUB CANADA WHOLESALE INC.
Statement of Income (Multiple-step)
Year Ended December 31, 2024

Sales ..................................................................................... $1,061,375

Cost of goods sold................................................................... 806,240
Gross profit.............................................................................. 255,135
Operating expenses
Administrative expenses............................................... $88,515
Selling expenses.......................................................... 42,100
Total operating expenses........................................ 0 130,615
Income from operations........................................................... 124,520
Other income and expenses
Interest income ................................................................. $(2,400)
Interest expense................................................................ 12,350 9,950
Income before income tax....................................................... 114,570
Income tax expense................................................................ 17,200
Net income.............................................................................. $ 97,370

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

(Income from operations + Other income – Other expenses = Income before income taxes)

c. Both statements of income result in the same amount of net income. The
multiple-step statement of income provides the user with more
information than does the single-step statement of income. The multiple-
step statement of income provides information on gross profit and
income from operations, which is not included on the single-step
statement of income.

d. Club Canada Wholesale Inc. 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).
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PROBLEM 5.9A

a.

Dec. 31 Insurance Expense ($3,000 × 11/12).............................. 2,750

Prepaid Insurance.................................................. 2,750

31 Supplies Expense............................................................ 2,190

Supplies ($2,940 – $750)...................................... 2,190

31 Depreciation Expense...................................................... 10,500

Accumulated Depreciation—Buildings................... 6,000
Accumulated Depreciation—Equipment ............... 4,500

31 Salaries Expense............................................................. 750

Salaries Payable................................................... 750

31 Interest Expense.............................................................. 735

Interest Payable..................................................... 735

31 Deferred Revenue ($4,000 – $975)................................. 3,025

Sales...................................................................... 3,025

Cost of Goods Sold.......................................................... 2,000

Inventory................................................................ 2,000

31 Income Tax Expense....................................................... 500

Income Tax Payable.............................................. 500

31 Cost of Goods Sold.......................................................... 2,950

Inventory................................................................ 2,950
($28,750 – $2,000 = $26,750; $26,750 – $23,800 = $2,950 shortage)

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PROBLEM 5.9A (CONTINUED)

b. Accumulated Depreciation—
Cash Equipment
Dec. 31 17,000 Dec. 31 18,000
Dec.31 Bal. 17,000 Dec. 31 4,500
Dec. 31 Bal. 22,500
Accounts Receivable
Dec. 31 31,700 Accounts Payable
Dec.31 Bal. 31,700 Dec. 31 33,735
Dec.31 Bal. 33,735
Inventory
Dec.31 28,750 Dec. 31 2,000 Deferred Revenue
Dec. 31 2,950 Dec. 31 3,025 Dec. 31 4,000
Dec. 31 Bal. 23,800 Dec.31 Bal. 975

Supplies Salaries Payable

Dec. 31 2,940 Dec. 31 2,190 Dec. 31 750
Dec. 31 Bal. 750 Dec. 31 Bal. 750

Prepaid Insurance Interest Payable

Dec. 31 3,000 Dec. 31 2,750 Dec. 31 735
Dec. 31 Bal. 250 Dec. 31 Bal. 735

Land Income Tax Payable

Dec. 31 30,000 Dec. 31 500
Dec.31 Bal. 30,000 Dec. 31 Bal. 500

Buildings Bank Loan Payable

Dec. 31 150,000 Dec. 31 147,100
Dec.31 Bal. 150,000 Dec.31 Bal. 147,100

Accumulated Depreciation—
Buildings
Dec. 31 24,000
Dec. 31 6,000
Dec. 31 Bal.30,000

Equipment
Dec. 31 45,000
Dec.31 Bal. 45,000

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PROBLEM 5.9A (CONTINUED)

b. continued)

Common Shares
Dec. 31 13,000 Salaries Expense
Dec.31 Bal. 13,000 Dec. 31 30,950
Dec. 31 750
Retained Earnings Dec. 31 Bal. 31,700
Dec. 31 31,425
Dec.31 Bal. 31,425

Dividends Declared
Dec. 31 2,000
Dec. 31 Bal. 2,000

Sales
Dec. 31 259,995
Dec. 31 3,025
Dec.31Bal. 263,020

Cost of Goods Sold

Dec. 31 171,225
Dec. 31 2,000
Dec. 31 2,950
Dec.31Bal. 176,175

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Depreciation Expense
Dec. 31 10,500
Dec. 31 Bal. 10,500

Utilities Expense
Dec. 31 5,100
Dec. 31 Bal. 5,100

Insurance Expense
Dec. 31 2,750
Dec. 31 Bal. 2,750

Supplies Expense
Dec. 31 2,190
Dec. 31 Bal. 2,190

Interest Expense
Dec. 31 8,090
Dec. 31 735
Dec. 31Bal. 8,825

Income Tax Expense

Dec.31 5,500
Dec. 31 500
Dec.31 Bal. 6,000

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PROBLEM 5.9A (CONTINUED)

c.
MESA INC.
Adjusted Trial Balance
December 31, 2024
Debit Credit
Cash............................................................................ $ 17,000
Accounts receivable .................................................... 31,700
Inventory...................................................................... 23,800
Supplies....................................................................... 750
Prepaid insurance........................................................ 250
Land............................................................................. 30,000
Buildings...................................................................... 150,000
Accumulated depreciation—buildings.......................... $ 30,000
Equipment.................................................................... 45,000
Accumulated depreciation—equipment....................... 22,500
Accounts payable........................................................ 33,735
Deferred revenue......................................................... 975
Salaries payable.......................................................... 750
Interest payable........................................................... 735
Income tax payable...................................................... 500
Bank loan payable....................................................... 147,100
Common shares.......................................................... 13,000
Retained earnings........................................................ 31,425
Dividends declared...................................................... 2,000
Sales............................................................................ 263,020
Cost of goods sold....................................................... 176,175
Salaries expense......................................................... 31,700
Depreciation expense.................................................. 10,500
Utilities expense........................................................... 5,100
Insurance expense...................................................... 2,750
Supplies expense........................................................ 2,190
Interest expense.......................................................... 8,825
Income tax expense..................................................... 6,000 0000 000
Totals...................................................................... $543,740 $543,740
(Total debit account balances = Total credit account balances)

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PROBLEM 5.9A (CONTINUED)

d.
MESA INC.
Statement of Income
Year Ended December 31, 2024

Sales .................................................................. $263,020

Cost of goods sold...................................................... 176,175
Gross profit.................................................................. 86,845
Operating expenses
Salaries expense................................................ $31,700
Depreciation expense......................................... 10,500
Utilities expense.................................................. 5,100
Insurance expense............................................. 2,750
Supplies expense............................................... 2,190
Total operating expenses................................... 52,240
Income from operations.............................................. 34,605
Other income and expenses
Interest expense................................................. 8,825
Income before income tax.......................................... 25,780
Income tax expense.................................................... 6,000
Net income.................................................................. $ 19,780

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

(Income from operations + Other income – Other expenses = Income before income tax)

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PROBLEM 5.9A (CONTINUED)

d. (continued)
MESA INC.
Statement of Changes in Equity
Year Ended December 31, 2024

Common Retained Total

Shares Earnings Equity

Balance, January 1 $10,000 $31,425 $41,425

Issued common shares 3,000 3,000
Net income 19,780 19,780
Dividends declared 0000 00 (2,000) (2,000)
Balance, December 31 $13,000 $49,205 $62,205

(Ending retained earnings = Beginning retained earnings ± Changes to retained earnings)

MESA INC.
Statement of Financial Position
December 31, 2015

Assets
Current assets
Cash.................................................................................................$17,000
Accounts receivable .................................................................... 31,700
Inventory...................................................................................... 23,800
Supplies....................................................................................... 750
Prepaid insurance ....................................................................... 250
Total current assets............................................................ 73,500
Property, plant, and equipment
Land........................................................ $ 30,000
Buildings.................................................. $150,000
Less: Accumulated depreciation.............. 30,000 120,000
Equipment............................................... $45,000
Less: Accumulated depreciation.............. 22,500 22,500
Total property, plant, and equipment 172,500
Total assets................................................................................ $246,000

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PROBLEM 5.9A (CONTINUED)

d. (continued)

Liabilities and Shareholders’ Equity

Current liabilities
Accounts payable....................................................................... $ 33,735
Deferred revenue....................................................................... 975
Salaries payable......................................................................... 750
Interest payable.......................................................................... 735
Income tax payable.................................................................... 500
Current portion of bank loan payable......................................... 9,800
Total current liabilities....................................................... 46,495
Non-current liabilities
Bank loan payable ($147,100 – $9,800)..................................... 137,300
Total liabilities.................................................................... 183,795
Shareholders’ equity
Common shares...................................................... $13,000
Retained earnings................................................... 49,205
Total shareholders’ equity........................................
Total liabilities and shareholders’ equity..................................... $246,000

LO 4 BT: AP Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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PROBLEM 5.10A

a. Gross profit margin $255,135 ÷ $1,061,375 = 24.0%

Profit margin $97,370 ÷ $1,061,375 = 9.2%

b.
Gros
s Net
Sales Profit Income

Existing balances $1,061,375 $255,135 $97,370

Increase sales ($1,061,375 × 15%) 159,206
Increase in gross profit 27,000 27,000
Increase in operating expenses (13,500)
Increase in income tax expense (2,700)
Revised amounts $1,220,581 $282,135 $108,170

c. Revised gross profit margin $282,135 ÷ $1,220,581 = 23.1%

Revised profit margin $108,170 ÷ $1,220,581 = 8.9%

Both the gross profit margin and the profit margin have decreased, but
the end result is an increase in net income, so the plan has merit.
LO 4,5 BT: AN Difficulty: C Time: 25 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
CM: Reporting and Finance

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PROBLEM 5.11A

a.
[1] Sales = $540,000 (given)
[8] Accounts receivable = Sales × 30% = $540,000 × 30% = $162,000

b.
[2] Cost of goods sold = 90% × inventory purchased = 90% ×
$300,000 = $270,000
[9] Inventory = 10% × inventory purchased = 10% ×
$300,000 = $30,000 or purchases less cost of
goods sold = $300,000 less $270,000 =
$30,000
[10] Accounts payable = 20% × inventory purchased = 20%
×$300,000 = $60,000

c.
[3] Gross profit = Sales – Cost of goods sold
= $540,000 – $270,000 = $270,000
[4] Operating expenses = $120,000 (given)
[5] Income before income taxes = Gross profit – Operating expenses =
$270,000 – $120,000 = $150,000

d.
[6] Income tax expense = Income before income taxes × 30% =
$150,000 × 30% = $45,000
[7] Net income = Income before income taxes – Income tax
expense = $150,000 – $45,000 = $105,000
[11] Income tax payable = given as equal to income tax expense =
$45,000

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PROBLEM 5.11A (CONTINUED)

e.
Gross profit margin = $270,000 ÷ $540,000 = 50.0%
Profit margin = $105,000 ÷ $540,000 = 19.4%

If Psang Inc. has a higher than average gross profit margin, it is either because
it is selling products at a higher price, (which is not the case), or because its cost
of goods sold as a percentage of sales is smaller than its competitors. The
resulting higher gross profit will be a contributing factor to a higher than average
profit margin ratio. Other factors that could contribute to a higher than average
profit margin ratio include lower than average operating expenses.
LO 4,5 BT: AN Difficulty: C Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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PROBLEM 5.12A

a. (in $ millions)

2021 2020 2019

Current $1,354.8 $1,793.2 $1,410.5

ratio = 1.3:1 = 2.1:1 = 1.5:1
$1,081.6 $848.4 $967.5

Gross ($7,684.9 ($5,454.4 ($4,658.3

= 45.7% = 35.1% = 22.3%
profit – $4,173.3) – $3,538.8) – $3,618.6)
margin $7,684.9 $5,454.4 $4,658.3

Profit $1,458.8 $559.9 ($269.7)

= 19.0% = 10.3% = (5.8%)
margin $7,684.9 $5,454.4 $4,658.3

b. Canfor’s current ratio increased (improved) in 2020, but deteriorated in

2021. Canfor’s gross profit margin experienced a constant increase
(improvement) over the three-year period as did the profit margin.

c.
2021 2021
Industry Average Canfor Corporation
Current ratio 2.5:1 1.3:1
Gross profit margin 25.0% 45.7%
Profit margin 3.0% 19.0%

Canfor’s current ratio is well below the industry average, but its gross profit
margin and profit margin are significantly better than those of the industry.

LO 5 BT: AN Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

CM: Reporting and Finance

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*PROBLEM 5.13A

a.
Nov. 2 Accounts Receivable (100 × $28)............................ 2,800
Refund Liability ($2,800 x 6%)........................ 168
Sales............................................................... 2,632

4 Purchases (200 × $11)............................................. 2,200

Accounts Payable............................................ 2,200

8 Purchases (200 × $12)............................................. 2,400

Accounts Payable............................................ 2,400

10 Refund Liability......................................................... 140

Accounts Receivable (5 × $28)....................... 140

13 Accounts Payable (10 × $12)................................... 120

Purchase Returns and Allowances................. 120

14 Accounts Receivable (30 × $40)............................. 1,200

Refund liability ($1,200 x 6%)...................... 72
Sales............................................................ 1,128

16 Refund Liability....................................................... 112

Accounts Receivable (4 × $28) ................... 112

18 Cash ....................................................................... 2,548

Accounts Receivable ($2,800 - $140 -$112) 2,548

24 Accounts Payable ($2,400 – $120)......................... 2,280

Cash............................................................ 2,280

26 Cash ..................................................................... 1,200

Accounts Receivable ($40 x 30) ................. 1,200

30 Accounts Receivable (45 × $25)............................. 1,125

Refund Liability ($1,125 x 6%)..................... 68
Sales............................................................ 1,057

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*PROBLEM 5.13A (CONTINUED)

b. The advantages of the periodic inventory system are that it is simpler and
cheaper (in terms of equipment and systems) compared to a perpetual
inventory system. There are fewer accounting entries and cash registers
do not need to be able to read bar codes to apply the appropriate cost as
is required in the perpetual inventory system.

However, a perpetual inventory system enables management to monitor

purchases and sales to make the optimum use of the money available for
stocking inventory. Fewer stock-outs are experienced when using the
perpetual system as reductions in inventory levels can be quickly
identified and restocking done, possibly automatically, before the
business runs out of inventory. With the perpetual system, cost of goods
sold can be reported at any time and consequently, timely reporting of
results can be achieved. Perpetual systems allow management to
quantify the cost of goods lost to theft. When customers make inquiries
concerning the availability of stock from a merchant, a quick reply can be
obtained and provided when a perpetual inventory system is used.
Finally, fewer inventory counts are required, saving salary costs and
minimizing lost sales from having to close the business for inventory
counts.

LO 1,6 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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*PROBLEM 5.14A

a.
Aug. 1 Supplies................................................................ 2,500
Cash............................................................ 2,500

3 Purchases............................................................. 35,000
Accounts Payable........................................ 35,000

4 Freight In.............................................................. 1,200

Cash............................................................ 1,200

6 Accounts Receivable............................................ 25,000

Refund Liability ($25,000 x 12%)................. 3,000
Sales............................................................ 22,000

7 Freight Out............................................................ 500

Cash............................................................ 500

9 Accounts Payable................................................. 3,000

Purchase Returns and Allowances.............. 3,000

10 Equipment............................................................ 45,000
Accounts Payable........................................ 45,000

11 No entry necessary.

13 Purchases............................................................. 3,000
Cash............................................................ 3,000

15 Cash ..................................................................... 25,000

Accounts Receivable................................... 25,000

22 Accounts Payable ($35,000 – $3,000).................. 32,000

Cash ($32,000 – $640)................................ 31,360
Purchase Discounts ($32,000 × 2%)...... 640

26 Accounts Receivable............................................ 30,000

Refund Liability ($30,000 x 12%)................. 3,600
Sales............................................................ 26,400

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*PROBLEM 5.14A (CONTINUED)

a. (continued)

Aug. 27 No entry necessary

30 Refund Liability......................................................... 1,200

Accounts Receivable....................................... 1,200

b.

Sept. 6 Accounts Payable ($35,000 – $3,000)...................... 32,000

Cash ....................................................................... 32,000

The cost of missing this purchase discount is the amount recorded in the
Purchase Discounts account when the payment was made within the discount
period ($32,000 × 2%) = $640. Expressing this in terms of an annual interest
rate, it would be the equivalent of paying 37.4% ($640 ÷ $31,260 × 365/20) for
the use of the money for 20 days.

LO 6 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 M: Reporting and
Finance

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*PROBLEM 5.15A
a.

Oct. 3 Purchases....................................................................... 7,800

Accounts Payable.................................................. 7,800
4 Freight In......................................................................... 476
Cash....................................................................... 476
9 Purchases....................................................................... 2,700
Accounts Payable.................................................. 2,700

12 Accounts Payable........................................................... 300

Purchase Returns and Allowances........................ 300
14 Accounts Receivable....................................................... 12,000
Refund Liability ($(12,000 x 1%)............................ 120
Sales...................................................................... 11,880
16 Cash ............................................................................... 5,479
Accounts Receivable.............................................. 5,479

17 Accounts Payable ($7,800 – $300)................................. 7,500

Purchase Discounts ($7,500 × 3%)........................ 225
Cash ($7,500 – $225)............................................ 7,275
26 Accounts Receivable....................................................... 13,300
Refund Liability ($(13,300 x 1%)............................ 133
Sales...................................................................... 13,167

28 Accounts Payable........................................................... 400

Purchase Returns and Allowances........................ 400
29 Accounts Payable ($2,700 – $400)................................. 2,300
Purchase Discounts ($2,300 × 1%)........................ 23
Cash ($2,300 – $23).............................................. 2,277
31 Cash…………………………………………………………. 8,945
Accounts Receivable………………………………... 8,945

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*PROBLEM 5.15A (CONTINUED)

b.

Cash Purchases
Oct. 1 Bal. 6,300 Oct. 4 476 Oct. 3 7,800
Oct. 16 5,479 Oct. 17 7,275 Oct. 9 2,700
Oct. 31 8,945 Oct. 29 2,277 Oct. 30 Bal. 10,500
Oct. 31 Bal. 10,696
Purchase Returns and Allowances
Accounts Receivable Oct. 12 300
Oct. 1 Bal. Oct. 16 5,479 Oct. 28 400
14,424 Oct. 30 Bal. 700
Oct. 14 12,000
Oct. 26 13,300 Oct. 31 8,945 Purchase Discounts
Oct. 30 Bal. 25,300 Oct. 17 225
Oct. 29 23
Inventory Oct. 30 Bal. 248
Oct. 1 Bal. 22,500
Oct. 30 Bal. 22,500 Freight In
Oct. 4 476
Accounts Payable Oct. 30 Bal. 476
Oct. 12 300 Oct. 3 7,800
Oct. 17 7,500 Oct. 9 2,700
Oct. 28 400
Oct. 29 2,300
Oct. 30 Bal.

Refund Liability
Oct. 14 120
Oct. 26 133
Oct.30 Bal. 253

Common Shares
Oct. 1 Bal. 14,000
Oct. 30 Bal. 14,000

Retained Earnings
Oct. 1 Bal. 29,224
Oct. 30 Bal. 29,224

Sales
Oct. 14 11,880
Oct. 26 13,167
Oct. 30 Bal. 25,047

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*PROBLEM 5.15A (CONTINUED)

c. ALPINE SNOWBOARD SHOP LIMITED

Trial Balance
October 31, 2024

Debit Credit
Cash.......................................................................................$ 10,696
Accounts receivable................................................................ 25,300
Inventory................................................................................. 22,500
Refund liability $ 253
Common shares...................................................................... 14,000
Retained earnings................................................................... 29,224
Sales....................................................................................... 25,047
Purchases...............................................................................
Freight in................................................................................. 10,500
Purchase returns and allowances........................................... 476 700
Purchase discounts................................................................. 00 248
00 $69,472
$69,472
(Total debit account balances = Total credit account balances)

d.
Apr. 30 Inventory (ending)..................................................... 19,165
Cost of Goods Sold.................................................. 13,363*
Purchase Returns and Allowances........................... 700
Purchase Discounts.................................................. 248
Inventory (beginning).......................................... 22,500
Purchases........................................................... 10,500
Freight In............................................................. 476

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

Purchase returns and allowances + Freight in – Ending inventory
Cost of goods sold = $22,500 + $10,500 – $248 – $700 + $476 – $19,165 = $13,363
LO 6 BT: AP Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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*PROBLEM 5.16A

a. FEISTY LTD.
Statement of Income (Partial)
Year Ended April 30, 2024

Sales ........................................................................................................... $9,050,000

Cost of goods sold
Inventory, May 1, 2023....................................................... $ 600,000
Purchases.................................................... $5,900,000
Less: Purchase discounts............................ 40,000
Net purchases.............................................. 5,860,000
Add: Freight in............................................ 120,000
Cost of goods purchased.................................................... 5,980,000
Cost of goods available for sale.......................................... 6,580,000
Inventory, April 30, 2024..................................................... 700,000
Cost of goods sold............................................................................ 5,880,000
Gross profit................................................................................................... $3,170,000

(Beginning inventory + Net purchases + Freight-in = Cost of goods purchased)

b.
Apr. 30 Inventory (ending)..................................................... 700,000
Cost of Goods Sold.................................................. 5,880,000
Purchase Discounts.................................................. 40,000
Inventory (beginning).......................................... 600,000
Purchases........................................................... 5,900,000
Freight In............................................................. 120,000

c. Gross profit margin:

$3,170,000 = 35.0%
$9,050,000

Feisty’s gross profit margin of 35% is better than the industry average of 30%. This
indicates that Feisty is making a higher gross profit from each dollar of sales than
the industry average, due to higher selling prices and/or lower costs for its
inventory.
LO 5,6 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

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*PROBLEM 5.17A

a.
Dec. 31 Inventory (ending)..................................................... 108,900
Cost of Goods Sold.................................................. 519,300
Purchase Returns and Allowances........................... 9,600
Purchase Discounts.................................................. 33,750
Inventory (beginning).......................................... 60,750
Purchases........................................................... 602,400
Freight In............................................................. 8,400

b.
ACTIVE ATHLETIC WEAR INC.
Statement of Income
Year Ended December 31, 2024

Sales .................................................................................... $921,000

Cost of goods sold
Inventory, January 1.................................................................. $ 60,750
Purchases ........................................................... $602,400
Less: Purchase discounts..................................... 33,750
Purchase returns and allowances................ 9,600
Net purchases....................................................... 559,050
Add: Freight in....................................................... 8,400
Cost of goods purchased........................................................... 567,450
Cost of goods available for sale................................................. 628,200
Less: Inventory, December 31................................................... 108,900
Cost of goods sold............................................................... 519,300
Gross profit....................................................................................... 401,700
Operating expenses
Administrative expenses............................................................ $271,350
Selling expenses........................................................................ 11,250
Total operating expenses.................................................... 282,600
Income from operations.................................................................... 119,100
Other income and expenses
Interest expense......................................................................... 15,600
Income before income tax................................................................ 103,500
Income tax expense.......................................................................... 24,000
Net Income ...................................................................................... $ 79,500

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

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*PROBLEM 5-17A (CONTINUED)

b. (continued)
ACTIVE ATHLETIC WEAR INC.
Statement of Changes in Equity
Year Ended December 31, 2024

Common Retained Total

Shares Earnings Equity

Balance, January 1 $ 75,000 $102,900 $177,900

Issued common shares 37,500 37,500
Net income 79,500 79,500
Dividends declared 000 0000 (12,000) (12,000)
Balance, December 31 $112,500 $170,400 $282,900

(Ending retained earnings = Beginning retained earnings ± Changes to retained earnings)

ACTIVE ATHLETIC WEAR INC.

Statement of Financial Position
December 31, 2024

Assets
Current assets
Cash............................................................................................................ $ 25,500
Accounts receivable .................................................................................... 66,300
Inventory...................................................................................................... 108,900
Prepaid insurance....................................................................................... 3,600
Total current assets............................................................................ 204,300
Property, plant, and equipment
Land..................................................................... $112,500
Buildings............................................................... $285,000
Less: Accumulated depreciation........................... 77,700 207,300
Equipment............................................................ $165,000
Less: Accumulated depreciation........................... 64,350 100,650
Total property, plant, and equipment.......... 420,450
Total assets................................................................................................ $624,750

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*PROBLEM 5.17A (CONTINUED)

b. (continued)

Liabilities and Shareholders’ Equity

Current liabilities
Accounts payable...................................................................... $ 123,250
Refund liability........................................................................... 6,200
Salaries payable........................................................................ 5,250
Property tax payable................................................................. 7,200
Deferred revenue...................................................................... 12,450
Current portion of mortgage payable........................................ 18,750
Total current liabilities...................................................... 173,100
Non-current liabilities
Mortgage payable ($187,500 – $18,750).................................. 168,750
Total liabilities................................................................... 341,850
Shareholders’ equity
Common shares..................................................... $112,500
Retained earnings.................................................. 170,400
Total shareholders’ equity................................................ 282,900
Total liabilities and shareholders’ equity..................................... $624,750

LO 6 BT: AP Difficulty: M Time: 60 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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