PORTERNORTON, 2ND EDITION, ALTERNATE THE SOLUTIONS APPROACH TO TEACHING HOMEWORK ANSWERS IN POWERPOI

1
THE SOLUTIONS APPROACH TO TEACHING HOMEWORK
ANSWERS IN POWERPOINT BY BRIAN
LEVENTHAL (BrianLev_at_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, dont forget to view in
SLIDE SHOW mode!
2
Missing amounts in the Cost of Goods Sold Model
Lets Review the COGS equation
Exercise 5-6

• BEGINNING INVENTORY XX
• COST OF GOODS PURCHASED XXX
• COST OF GOODS AVAILABLE FOR SALE XXXX
• - ENDING INVENTORY
  ( XX)
• COST OF GOODS SOLD XXX

3
Now lets review the Cost of Goods Purchased
equation
Exercise 5-6

• 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 1 Plug in what you know Solve
for any unknowns!
1,400

• BEGINNING INVENTORY
  XX PURCHASES 6,230
  Less Purchase Return Allowances (470)
  Purchase Discount (200)
  NET PURCHASES
  XX Add
  Transportation-In 150
  
• COST OF GOODS PURCHASED XX
• COST OF GOODS AVAILABLE FOR SALE 7,110
• - ENDING INVENTORY XX
• COST OF GOODS SOLD
  5,220

5,560
5,710
(1,890)
5
EX 5-6 CASE 2 Plug in what you know Solve
for any unknowns!

• BEGINNING INVENTORY
  2,350 PURCHASES
  5,720 Less Purchase Return
  Allowances (800) Purchase Discount
  (XX)
• NET PURCHASES XX
• Add Transportation-In 500
• COST OF GOODS PURCHASED XX
• 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 3 Plug in what you know Solve
for any unknowns!

• BEGINNING INVENTORY
  1,890 PURCHASES
  XX Less Purchase Return
  Allowances (550) Purchase Discount
  (310)
• NET PURCHASES XX
• Add Transportation-In 420
• COST OF GOODS PURCHASED XX
• COST OF GOODS AVAILABLE FOR SALE 8,790
• - ENDING INVENTORY (1,200) COST
  OF GOODS SOLD XX

7,340
6,480
6,900
7,590
7
Problem 5-8 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.
• Required1. For each of the following
  transactions of the month of June for Weekend
  Wonders Inc., determine the effect on the
  accounting equation.

8
A. Purchased merchandise from suppliers at a
cost of 80,000 with credit terms of 2/10, net 30.
Problem 5-8 Periodic Inventory System Gross
Method Transaction of a Merchandiser and Partial
Income Statement
B a la n c e S h e e t
Income StatementA s s e t sLiabilitiesOwners
Equity Revenue- Expense
Dont 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
Problem 5-8 Periodic Inventory System Gross
Method Transaction of a Merchandiser and Partial
Income Statement
B. Paid freight costs of 4,250 to the common
carrier for merchandise purchased.
Dont forget that Transportation-In is an Expense
item because it is part of COGS!
B a la n c e S h e e t
Income StatementA s s e t sLiabilitiesOwners
Equity Revenue- Expense
Cash (4,250)
Transportation
-In (4,250)
4,250
4,250
10
Problem 5-8 Periodic Inventory System Gross
Method Transaction of a Merchandiser and Partial
Income Statement
C. Returned defective merchandise to suppliers
and received credits of 2,300, the amount of
credit before 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 t
Income StatementA s s e t sLiabilitiesOwners
Equity Revenue- Expense
Accounts Payable (2,300)
Purchase
Returns Allowances
2,300
80,000
80,000
2,300
2,300
77,700
11
Problem 5-8 Periodic Inventory System Gross
Method Transaction of a Merchandiser and Partial
Income Statement
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 t
Income StatementA s s e t sLiabilitiesOwners
Equity Revenue- Expense
Sales
Revenue 92,000
Cash 24,000
A/R 68,000
68,000
92,000
24,000
12
Problem 5-8 Periodic Inventory System Gross
Method Transaction of a Merchandiser and Partial
Income Statement
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 t
Income StatementA s s e t sLiabilitiesOwners
Equity Revenue- Expense
Sales Returns
Allowances (4,000)
Accounts Receivable (4,000)
68,000
92,000
4,000
4,000
64,000
13
Problem 5-8 Periodic Inventory System Gross
Method Transaction of a Merchandiser and Partial
Income Statement
F. Paid off Purchases 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
Problem 5-8 Periodic Inventory System Gross
Method Transaction of a Merchandiser and Partial
Income Statement
F. Paid off Purchases 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
.98
62,000
60,760
Cash Paid Gross Purchase Amount - Purchase
Discount
62,000

1,240
60,760
- ???????
15
Problem 5-8 Periodic Inventory System Gross
Method Transaction of a Merchandiser and Partial
Income Statement
F. Paid off Purchases 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 t
Income StatementA s s e t sLiabilitiesOwners
Equity Revenue- Expense
Accounts Payable (62,000)
Purchase Discounts 1,240
Cash (60,760)
16
Problem 5-8 Periodic Inventory System Gross
Method Transaction of a Merchandiser and Partial
Income Statement
F. Paid off Purchases 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 t
Income StatementA s s e t sLiabilitiesOwners
Equity Revenue- Expense
Accounts Payable (62,000)
Cash (60,760)
Purchase Discounts 1,240
80,000
2,300
2,300
80,000
77,700
1,240
60,760
62,000
15,700
17
Problem 5-8 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
Problem 5-8 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
.98
56,000
54,880
Cash Received Gross Sales Amount - Sales
Discount

- ??????
56,000
54,880
1,120
19
Problem 5-8 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.
B a la n c e S h e e t
Income StatementA s s e t sLiabilitiesOwners
Equity Revenue- Expense
Sales Discounts is a Contra-Revenue account
Cash 54,880
Sales Discounts (1,120)
A/R (56.000)
20
Problem 5-8 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.
B a la n c e S h e e t
Income StatementA s s e t sLiabilitiesOwners
Equity Revenue- Expense
Cash 54,880
A/R (56.000)
Sales Discounts (1,120)
A/R
1,120
54,880
56,000
8,000
21
Problem 5-8 2. Prepare a partial Income
Statement for the Month of June up to gross
margin.
Sales Revenue 92,000 Less Sales RA
(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 RA (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
Problem 5-8 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
Problem 5-8 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
I. Determine cost of goods sold for 2001
Problem 5-12 Financial Statements

• Beginning inventory 6,400
• Purchases 40,200
• LessPurchase 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
Problem 5-12 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
P,P E Land 20,000
Building and
Equipment,net 55,550 Total
P,P E 75,550 Total Assets
86,099
Problem 5-12 3. Prepare a Balance Sheet
dated 12/31/98
Assets Current Assets Cash
590 A/R 2,359
Inventory 7,500Int. Rec
100 Total Current
Asset 10,549
Liabilities Current Liabilities Salaries payable
650 Income tax payable 3,200 Total
liabilities 3,850
Stockholders Equity Capital stock
50,000Retained earnings 32,249Total SE
82,249 Total
LiabilitiesStockholders Equity
86,099
Beg. R/E Net Income - Dividends Ending
R/E 32,550 5,699 -
6,000 32,249