financial accounting 7th edition

Chapter Five

Challenge Exercise 1Expands on: E5-2LO: 2

Information related to Pagnucci Co. is presented below.

1. On April 5, purchased merchandise from Mockingbird Company for $20,000 terms 2/10, net/30, FOB shipping point. 2. On April 6 paid freight costs of $500 on merchandise purchased from Mockingbird. 3. On April 7, purchased equipment on account for $29,000. 4. On April 8, returned damaged merchandise to Mockingbird Company and was granted a $3,000 credit for returned merchandise. 5. 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 2

Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Financial and Managerial Accounting, Challenge Exercises

(For Instructor Use Only) Page 5-1

Expands on: E5-3LO: 2, 3

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. 9 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. 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 3Expands on: E5-5



LO: 3

Presented below are transactions related to Stealer’s Company.

1. On December 3, Stealer’s Company sold $400,000 of merchandise to Sharif Co., terms 2/10, n/30, FOB shipping point. The cost of the merchandise sold was $240,000. 2. On December 8, Sharif Co. was granted an allowance of $19,000 for merchandise purchased on December 3. 3. On December 13, Stealer’s Company received the balance due from Sharif Co.

Instructions: (a) Prepare the journal entries to record these transactions on the books of Stealer’s Company using a perpetual inventory system. (b) Assume that Stealer’s Company received the balance due from Sharif Co. on January 2 of the following year instead of December 13. Prepare the journal entry to record the receipt of payment on January 2.(c) 1) What is the difference between a Sales Return and a Sales Allowance? 2) How would the journal entry on December 8 be different if it was a Sales Return instead of a Sales Allowance?




Craig Ferguson Company had the following account balances at year-end: Cost of Goods Sold $70,000; Inventory $17,500; Operating Expenses $33,000; Sales Revenue $126,000; Sales Discounts $1,400; and Sales Returns and Allowances $1,950. A physical count of inventory determines that inventory on hand is $16,450.

Instructions: (a) Prepare the adjusting entry necessary as a result of the physical count. (b) Prepare closing entries.(c) Assume that the physical count of inventory indicated that inventory on hand is $17,800 (the account still shows a balance of $17,500 due to errors made during the year. Prepare the adjusting entry necessary as a result of the physical count.(d) What is Craig Ferguson Company’s net income for the year?




In its income statement for the year ended 12/31/14, Beckham Company reported the following condensed data:Operating expenses $ 1,142,000 Interest revenue $ 35,000Cost of goods sold 1,400,000 Loss on disposal of plant assets 10,000Interest expense 88,000 Net sales 2,850,000

Instructions: (a) Prepare a multiple-step income statement. (b) Prepare a single-step income statement.(c) How did Beckham compute the amount it is reporting as net sales?(d) Why are some expenses reported as “Other expenses” in the multiple-step income statement?

Challenge Exercise 6Expands on: E5-14LO: 5, 6

Presented below is financial information for two different companies.


(For Instructor Use Only) -5

Viet NaiseCompany Company

Sales revenue $180,000 $ (e) Sales discounts 2,000 2,500Sales returns (a) 5,000 Net sales 171,000 200,000 Cost of goods sold 103,000 (f) Gross profit (b) 80,000 Operating expenses 45,000 (g)Income from operations (c) 51,000Other revenues (expenses) 4,000 (h)Net income (d) 49,000

Instructions: (a) Determine the missing amounts above.(b) Determine the gross profit rates. (Round to one decimal place.)


The trial balance of Alexei Company at the end of its fiscal year, August 31, 2014, includes these accounts: Inventory $20,000; Purchases $169,000; Sales Revenue $220,000; Freight-In $5,000; Sales Discounts $3,200; Sales Returns and



Allowances $3,800; Freight-Out $1,500; Purchase Discounts $2,900 and Purchase Returns and Allowances $2,400. The ending Inventory is $27,000.

Instructions: (a) Prepare a cost of goods sold section for the year ending August 31 (periodic inventory).(b) Compute Alexei’s gross profit and gross profit rate.


This information relates to Borkowski Co. 1. On April 5 purchased merchandise from D. Munez Company for $30,000, terms 2/10, net/30, FOB shipping point. 2. On April 6 paid freight costs of $1,200 on merchandise purchased from D. Munez Company.



3. On April 7 purchased equipment on account for $44,000. 4. On April 8 returned some of April 5 merchandise to D. Munez Company which cost $3,200. 5. On April 15 paid the amount due to D. Munez Company in full.

Instructions: (a) Prepare the journal entries to record these transactions on the books of Borkowski Co. using a periodic inventory system. (b) Assume that Borkowski Co. paid the balance due to D. Munez Company on May 4 instead of April 15. Prepare the journal entry to record this payment.(c) Assume Borkowski sold some of the goods purchased to a customer. How would the entries be different if Borkowski used the periodic method or the perpetual method?


The trial balance columns of the worksheet for Gray Company at June 30, 2014, are as follows.

GRAY COMPANYWorksheet



For the Month Ended June 30, 2014

Trial Balance Account Titles Debit Credit Cash $ 2,400 Accounts Receivable 2,500 Prepaid Insurance 1,200Inventory 12,000 Accounts Payable $ 1,400 Common Stock 5,000 Retained Earnings 3,000Sales 40,500 Sales Returns and Allowances 1,000Cost of Goods Sold 20,600 Operating Expenses 10,200

$49,900 $49,900

Other data: Operating expenses incurred on account which have not yet been recorded total $1,100. The balance in prepaid insurance is a one-year policy acquired March 1, 2014 (assume insurance expense is an operating expense).

Instructions: Enter the trial balance on a worksheet and complete the worksheet.



financial accounting 7th edition

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