THE SOLUTIONS APPROACH TO TEACHING HOMEWORK ANSWERS IN POWERPOINT BY BRIAN LEVENTHAL

1. THE SOLUTIONS APPROACH TO TEACHING HOMEWORK ANSWERS IN POWERPOINT BY BRIAN LEVENTHAL (BrianLev@uic.edu), UNIVERSITY OF ILLINOIS AT CHICAGO For Use in class , printed as a handout and on the web. PORTER/NORTON, 3rd EDITION, ALTERNATE CHAPTER 5 For all the full effects, don’t forget to view in SLIDE SHOW mode!

2. Exercise 5-6 Missing amounts in the Cost of Goods Sold ModelLet’s Review the COGS equation: BEGINNING INVENTORY XX + COST OF GOODS PURCHASED** XXX COST OF GOODS AVAILABLE FOR SALE XXXX - ENDING INVENTORY ( XX) COST OF GOODS SOLD XXX

3. Exercise 5-6 Now let’s review the Cost of Goods Purchased equation: PURCHASES XXX Less: Purchase Return & Allowances (X) Purchase Discounts (X) NET PURCHASES XX Add: Transportation-In X COST OF GOODS PURCHASED XX

4. EX 5-6 CASE 1Plug in what you know & Solve for any unknowns! 1,400 BEGINNING INVENTORYXX + PURCHASES 6,230 Less: Purchase Return & Allowances (470) Purchase Discount (200)NET PURCHASES XX Add: Transportation-In 150 COST OF GOODS PURCHASEDXX COST OF GOODS AVAILABLE FOR SALE7,110 - ENDING INVENTORYXX COST OF GOODS SOLD 5,220 5,560 5,710 (1,890)

5. EX 5-6 CASE 2Plug in what you know & Solve for any unknowns! BEGINNING INVENTORY 2,350 + PURCHASES 5,720 Less: Purchase Return & Allowances (800) Purchase Discount (XX) NET PURCHASESXX Add: Transportation-In 500 COST OF GOODS PURCHASEDXX COST OF GOODS AVAILABLE FOR SALE XX - ENDING INVENTORY (1,750) COST OF GOODS SOLD 5,570 (450) 4,470 4,970 7,320

6. EX 5-6 CASE 3Plug in what you know & Solve for any unknowns! 7,340 BEGINNING INVENTORY 1,890 + PURCHASES XX Less: Purchase Return & Allowances (550) Purchase Discount (310) NET PURCHASESXX Add: Transportation-In 420 COST OF GOODS PURCHASEDXX COST OF GOODS AVAILABLE FOR SALE8,790 - ENDING INVENTORY (1,200) COST OF GOODS SOLDXX 6,480 6,900 7,590

7. Problem5-8 Transaction of a Merchandiser and Partial Income Statement • Weekend Wonders Inc. operates chain of discount hardware stores. The company uses a periodic inventory system. • Inventory on hand on June 1, 1998, amounts to $25,670; on June 30, 1998 it is $30,200.The company records all purchases and sales at the gross amount. • Required:1. For each of the following transactions of the month of June for Weekend Wonders Inc., determine the effect on the accounting equation.

8. Problem5-8 Periodic Inventory System & Gross Method Transaction of a Merchandiser and Partial Income Statement Purchases A/P A. Purchased merchandise from suppliers at a cost of $80,000 with credit terms of 2/10, net 30. B a la n c e S h e e tIncome StatementA s s e t s=Liabilities+Owners’ Equity + Revenue- Expense Don’t forget that Purchases is an Expense item because it is part of COGS! Accounts Payable 80,000 Purchases (80,000) 80,000 80,000

9. Problem5-8 Periodic Inventory System & Gross Method Transaction of a Merchandiser and Partial Income Statement Cash Transportation In B. Paid freight costs of $4,250 to the common carrier for merchandise purchased. Don’t forget that Transportation-In is an Expense item because it is part of COGS! B a la n c e S h e e tIncome StatementA s s e t s=Liabilities+Owners’ Equity + Revenue- Expense Cash (4,250) Transportation -In (4,250) 4,250 4,250

10. Problem5-8 Periodic Inventory System & Gross Method Transaction of a Merchandiser and Partial Income Statement Purchases A/P Purchases R&A C. Returned defective merchandise to suppliers and received credits of $2,300, the amount of creditbefore taking into account any purchase discounts. Purchase Returns & Allowances is a Contra-Expense account, it is part of COGS B a la n c e S h e e tIncome StatementA s s e t s=Liabilities+Owners’ Equity + Revenue- Expense Accounts Payable (2,300) Purchase Returns & Allowances 2,300 80,000 80,000 2,300 2,300 77,700

11. Problem5-8 Periodic Inventory System & Gross Method Transaction of a Merchandiser and Partial Income Statement Cash Sales Revenue A/R D. Realized $92,000 in sales for the month, of which $68,000 is on credit; the remainder was received in cash. The credit sales are made with terms of 2/10, net 45. B a la n c e S h e e tIncome StatementA s s e t s=Liabilities+Owners’ Equity + Revenue- Expense Sales Revenue 92,000 Cash 24,000 A/R 68,000 24,000 68,000 92,000

12. Problem5-8 Periodic Inventory System & Gross Method Transaction of a Merchandiser and Partial Income Statement Sales R&A Sales Revenue A/R E. Gave sales returns& allowances on credit sales of $4,000 during the month. Sales Returns & Allowances is a Contra-Revenue account B a la n c e S h e e tIncome StatementA s s e t s=Liabilities+Owners’ Equity + Revenue- Expense Sales Returns & Allowances (4,000) Accounts Receivable (4,000) 68,000 92,000 4,000 4,000 64,000

13. Problem5-8 Periodic Inventory System & Gross Method Transaction of a Merchandiser and Partial Income Statement F. Paid offPurchases of $62,000 to suppliers for earlier purchases on account. All amounts paid during the month are within the discount period.Credit terms were 2/10, net 30. Using the Gross Purchase method, A/P must be reduced using the Gross Purchase Price and the Purchase Discount must be recorded when the discount is taken.

14. Problem5-8 Periodic Inventory System & Gross Method Transaction of a Merchandiser and Partial Income Statement F. Paid offPurchases of $62,000 to suppliers for earlier purchases on account. All amounts paid during the month are within the discount period.Credit terms were 2/10, net 30. Cash Paid = Gross Purchase Amount x(100% -Discount %) = Gross Purchase Amount x $60,760 $62,000 .98 Cash Paid = Gross Purchase Amount - Purchase Discount $60,760 = $62,000 $1,240 - ???????

15. Problem5-8 Periodic Inventory System & Gross Method Transaction of a Merchandiser and Partial Income Statement F. Paid offPurchases of $62,000 to suppliers for earlier purchases on account. All amounts paid during the month are within the discount period. Credit terms were 2/10, net 30. Purchase Discounts is a Contra-Expense account part of COGS Cash Paid = Gross Purchase Amount - Discount = $62,000 1,240 $60,760 B a la n c e S h e e tIncome StatementA s s e t s=Liabilities+Owners’ Equity + Revenue- Expense Accounts Payable (62,000) Purchase Discounts 1,240 Cash (60,760)

16. Problem5-8 Periodic Inventory System & Gross Method Transaction of a Merchandiser and Partial Income Statement Purchases A/P Purchases R&A Purchases Discounts Cash F. Paid offPurchases of $62,000 to suppliers for earlier purchases on account. All amounts paid during the month are within the discount period. Credit terms were 2/10, net 30. B a la n c e S h e e tIncome StatementA s s e t s=Liabilities+Owners’ Equity + Revenue- Expense Accounts Payable (62,000) Cash (60,760) Purchase Discounts 1,240 80,000 2,300 80,000 2,300 1,240 60,760 77,700 $62,000 15,700

17. Problem5-8 Periodic Inventory System & Gross Method Transaction of a Merchandiser and Partial Income Statement G. Received $56,000 worth of Accounts Receivable from customers. All amounts received during the month are within the discount period. Using the Gross Sales method, A/R must be reduced using the Gross Sales Price and the Sales Discount must be recorded when taken.

18. Problem5-8 Periodic Inventory System & Gross Method Transaction of a Merchandiser and Partial Income Statement G. Received $56,000 worth of Accounts Receivable from customers. All amounts received during the month are within the discount period. Cash Received = Gross Sales Amount x(100% -Discount %) = x $54,880 $56,000 .98 Cash Received = Gross Sales Amount - Sales Discount = $56,000 - ?????? $54,880 $1,120

19. Problem5-8 Periodic Inventory System & Gross Method Transaction of a Merchandiser and Partial Income Statement Cash Received = Gross Sales Amount - Sales Discount = - ?????? $54,880 $1,120 $56,000 G. Received $56,000 worth of Accounts Receivable from customers. All amounts received during the month are within the discount period. B a la n c e S h e e tIncome StatementA s s e t s=Liabilities+Owners’ Equity + Revenue- Expense Sales Discounts is a Contra-Revenue account Cash 54,880 Sales Discounts (1,120) A/R (56.000)

20. Problem5-8 Periodic Inventory System & Gross Method Transaction of a Merchandiser and Partial Income Statement Sales R&A Sales R&A Sales Revenue 68,000 Cash 4,000 92,000 4,000 64,000 G. Received $56,000 worth of Accounts Receivable from customers. All amounts received during the month are within the discount period. B a la n c e S h e e tIncome StatementA s s e t s=Liabilities+Owners’ Equity + Revenue- Expense Cash 54,880 A/R (56.000) Sales Discounts (1,120) A/R 54,880 1,120 56,000 8,000

21. Problem5-8 2. Prepare a partial Income Statement for the Month of June up to gross margin. Sales Revenue $92,000 Less: Sales R&A (4,000) Sales Discounts (1,120) Net Sales $86,880 Cost of Goods Sold: Beginning Inventory, June 1,1998 $25,670 Purchases $80,000 Less: Purchase R&A (2,300) Purchase Discounts (1,240) Net Purchases 76,460 Add: Transportation-In 4,250 Cost of Goods Purchased 80,710 Cost of Goods Available for Sale $106,380 Less: Ending Inventory, June 30,1998 30,200 Cost of Goods Sold 76,180 Gross Margin $10,700

22. Problem5-8 Transaction of a Merchandiser and Partial Income Statement 3. Assume that Weekend Wonders decides as a matter of policy to forgo the discount for early payment on purchases (credit terms are 2/10, net 30). What return would Weekend Wonders need to earn on the money it invests by not paying early to justify this decision? Provide any necessary calculations to support your answer.

23. Problem5-8 Transaction of a Merchandiser and Partial Income Statement The company would need to earn a return of approximately 36.7% to justify the decision to forego the discount for early payment on purchases: Assume a purchase of $1,000 and a 2% discount for paying 20 days earlier than the required period. Thus, there would be a savings of $20 for 20 days. This is a savings of $360 per year ($20 x 18 periods of 20 days in a year). Thus, the alternative return required is 360/980, or 36.7%

24. Problem5-12 Financial Statements I. Determine cost of goods sold for 2001 Beginning inventory $6,400 Purchases $40,200 Less:Purchase Discounts 800 Purchase R & A 0 Net purchases 39,400 Add: Transportation-In 375 Cost of goods purchased 39,775 Cost of goods available for sale 46,175 Less: Ending Inventory 7,500 Cost of Goods Sold $38,675

25. Problem5-12 2. Determine Net Income for 2001 Sales $84,364 Less: Sales returns 780 Sales discounts 0 Net Sales $83,584 Cost of Goods Sold(from Part I) (38,675) Gross margin 44,909 Operating expenses: Salaries 25,600 Advertising 4,510 Utilities 3,600 Depreciation 2,300 Total operating expenses (36,010) Income before tax 8,899 Income tax expense (3,200) Net Income $5,699

26. Problem5-12 3. Prepare a Balance Sheet dated 12/31/98 Assets Current AssetsCash $ 590 A/R 2,359 Inventory 7,500Int. Rec 100Total Current Asset $10,549 LiabilitiesCurrent Liabilities Salaries payable $ 650 Income tax payable 3,200 Total liabilities $ 3,850 P,P & E Land $20,000 Building and Equipment,net 55,550Total P,P & E 75,550Total Assets $86,099 Stockholders’ Equity Capital stock $50,000Retained earnings 32,249*Total SE 82,249 Total Liabilities&Stockholders’ Equity $86,099 * Beg. R/E + Net Income - Dividends = Ending R/E 32,550 + 5,699 - 6,000 = 32,249