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Chapter 5: Q5-5RQ (page 294)
How is gross profit calculated, and what does it represent?
Gross profit is the difference between the net sales revenues earned by a business concern and the cost of goods sold.
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Consider the following transactions for Toys and More:
May 8 Toys and More buys \(113,300 worth of MegoBlock toys on account with credit terms of 2/10, n/60.
12 Toys and More returns \)11,250 of the merchandise to MegoBlock due to damage during shipment.
15 Toys and More paid the amount due, less the return and discount.
Requirements
1. Journalize the purchase transactions. Explanations are not required.
2. In the final analysis, how much did the inventory cost Toys and More?
The adjusted trial balance of Quality Office Systems at March 31, 2018, follows:
Journalize the following transactions that occurred in November 2018 for Julie’s Fun World. No explanations are needed. Identify each accounts payable and accounts receivable with the vendor or customer name. Julie’s Fun World estimates sales returns at the end of each month.
Nov. 4 Purchased merchandise inventory on account from Vera Company, \(5,000. Terms 3/10, n/EOM, FOB shipping point.
6 Paid freight bill of \)100 on November 4 purchase
8 Returned half the inventory purchased on November 4 from Vera Company.
10 Sold merchandise inventory for cash, \(1,100. Cost of goods, \)400. FOB destination.
11 Sold merchandise inventory to Geary Corporation, \(11,100, on account, terms of 2/10, n/EOM. Cost of goods, \)6,105. FOB shipping point.
12 Paid freight bill of \(20 on November 10 sale.
13 Sold merchandise inventory to Caldwell Company, \)9,500, on account, terms of n/45. Cost of goods, \(5,225. FOB shipping point.
14 Paid the amount owed on account from November 4, less return and discount.
17 Received defective inventory as a sales return from the November 13 sale, \)500. Cost of goods, \(275.
18 Purchased inventory of \)3,600 on account from Rainman Corporation. Payment terms were 2/10, n/30, FOB destination.
20 Received cash from Geary Corporation, less discount.
26 Paid amount owed on account from November 18, less discount.
28 Received cash from Caldwell Company, less return.
29 Purchased inventory from Sandra Corporation for cash, \(12,300, FOB shipping point. Freight in paid to shipping company, \)170.
Journalize the following sales transactions for Austin Mall. Assume Austin Mall uses the gross method to record sales revenue. Explanations are not required.
Jan. 4 Sold \(10,000 of antiques on account, credit terms are 1/15, n/30. Cost of goods is \)5,000.
20 Austin Mall received payment from the customer on the amount due from Jan. 4.
20 Sold \(5,200 of antiques on account, credit terms are 1/10, n/45, FOB destination. Cost of goods is \)2,600.
20 Austin Mall paid $120 on freight out.
29 Received payment from the customer on the amount due from Jan. 20, less the discount.
Party-Time T-Shirts sells T-shirts for parties at the local college. The company completed the first year of operations, and the shareholders are generally pleased with operating results as shown by the following income statement:
PARTY-TIME T-SHIRTS
Income Statement
Year Ended December 31, 2017
Net Sales Revenue \(350,000
Cost of Goods Sold 210,000
Gross Profit 140,000
Operating Expenses:
Selling Expense 40,000
Administrative Expense 25,000
Net Income \)75,000
Bill Hildebrand, the controller, is considering how to expand the business. He proposes two ways to increase profits to \(100,000 during 2018.
a. Hildebrand believes he should advertise more heavily. He believes additional advertising costing \)20,000 will increase net sales by 30% and leave administrative expense unchanged. Assume that Cost of Goods Sold will remain at the same percentage of net sales as in 2017, so if net sales increase in 2018, Cost of Goods Sold will increase proportionately.
b. Hildebrand proposes selling higher-margin merchandise, such as party dresses, in addition to the existing product line. An importer can supply a minimum of 1,000 dresses for \(40 each; Party-Time can mark these dresses up 100% and sell them for \)80. Hildebrand realizes he will have to advertise the new merchandise, and this advertising will cost $5,000. Party-Time can expect to sell only 80% of these dresses during the coming year.
Help Hildebrand determine which plan to pursue. Prepare a multi-step income statement for 2018 to show the expected net income under each plan.
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