Chapter 5

Question 1

Using the following year-end information for WorkFit calculate the acid-test ratio:

Cash $ 51,900
Short-term investments 12,000
Accounts receivable (all current) 54,000
Inventory 325,000
Supplies 17,500
Accounts payable 106,500
Wages payable 24,500

Answer 1

0.90

Quick Assets = $117,900 = $51,900 + 12,000 + 54,000

Acid-Test Ratio = Quick Assets/Current Liabilities

Acid-Test Ratio = $117,900/$131,000 = 0.90

Question 2

A buyer of $8,100 in merchandise inventory failed to take advantage of the vendor’s credit terms of 3/15, n/45, and instead paid the invoice in full at the end of 45 days. By not taking advantage of the cash discount, the buyer lost the discount of:

Answer 2

$243

$8,100 × 0.03 = $243

Question 3

Cushman Company had $844,000 in net sales, $369,250 in gross profit, and $211,000 in operating expenses. Cost of goods sold equals:

Answer 3

$474,750

Cost of Goods Sold = Net Sales − Gross Profit; $844,000 − $369,250 = $474,750

Question 4

On September 12, Vander Company sold merchandise in the amount of $1,900 to Jepson Company, with credit terms of 2/10, n/30. The cost of the items sold is $1,310. Vander uses the periodic inventory system and the gross method of accounting for sales. On September 14, Jepson returns some of the merchandise. The selling price of the merchandise is $165 and the cost of the merchandise returned is $115. Jepson pays the invoice on September 18 and takes the appropriate discount. The journal entry that Vander makes on September 18 is:

Answer 4

Account Title
Cash Dr. 1,700.30
Sales discounts Dr. 34.70
Accounts Receivable Cr. 1,735.00

Accounts Receivable = $1,900 − $165 = $1,735.00

Sales Discounts = $1,735 × 0.02 = $34.70

Cash = $1,735 − $34.70 = $1,700.30

Question 5

The gross margin ratio:

Answer 5

Indicates the percent of net sales remaining after covering the cost of the goods sold.

Question 6

A company that uses the net method of recording purchases and a perpetual inventory system purchased $2,300 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $450 worth of merchandise. On July 28, it paid the full amount due. The correct journal entry to record the payment on July 28 is:

Answer 6

Debit Accounts Payable $1,813; debit Discounts Lost $37; credit Cash $1,850.

Purchase, net of discount = $2,300 × 0.98 = $2,254

Purchase return, net of discount = $450 × 0.98 = $441

Debit to Accounts Payable = $2,254 − 441 = $1,813

No discount may be taken because the payment is made after the discount period.

Question 7

Juniper Company uses a perpetual inventory system and the gross method of accounting for purchases. The company purchased $9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500 worth of merchandise. On August 16, it paid the full amount due. The correct journal entry to record the payment on August 16 is:

Answer 7

Debit Accounts Payable $8,250; credit Merchandise Inventory $82.50; credit Cash $8,167.50.

Cash Paid = ($9,750 − $1,500) × 0.99 = $8,167.50

Question 8

KLM Corporation’s quick assets are $5,920,000, its current assets are $11,700,000 and its current liabilities are $8,000,000. Its acid-test ratio equals:

Answer 8

0.74

Acid-Test Ratio = Quick Assets/Current Liabilities

Acid-Test Ratio = $5,920,000/$8,000,000 = 0.74

Question 9

Cushman Company had $800,000 in net sales, $350,000 in gross profit, and $200,000 in operating expenses. Cost of goods sold equals:

Answer 9

$450,000

Cost of Goods Sold = Net Sales − Gross Profit; $800,000 − $350,000 = $450,000

Question 10

Prentice Company had cash sales of $95,400, credit sales of $84,125, sales returns and allowances of $2,150, and sales discounts of $3,925. Prentice’s net sales for this period equal:

Answer 10

$173,450

Net Sales = $95,400 + $84,125 − $2,150 − $3,925 = $173,450

Question 11

Cushman Company had $800,000 in sales, sales discounts of $12,000, sales returns and allowances of $18,000, cost of goods sold of $380,000, and $275,000 in operating expenses. Gross profit equals:

Answer 11

$390,000

Gross Profit (Margin) = $800,000 − $12,000 − $18,000 − $380,000 = $390,000

Question 12

A company has net sales of $375,000 and its gross profit is $157,500. Its cost of goods sold is:

Answer 12

$217,500

Gross Profit = Net Sales − Cost of Goods Sold

Cost of Goods Sold = $375,000 − $157,500 = $217,500

Question 13

On September 12, Ryan Company sold merchandise of $5,800 to Johnson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Ryan uses the perpetual inventory system and the net method of accounting for sales. On September 14, Johnson returns some of the merchandise. The selling price of the merchandise is $500 and the cost of the merchandise returned is $350. Johnson pays the invoice on September 18 and takes the appropriate discount. The journal entry that Ryan makes on September 18 is:

Answer 13

Account Title Debit Credit
Cash Dr. 5,194
Accounts Receivable Cr. 5,194

Accounts Receivable = ($5,800 × 0.98) − ($500 × 0.98) = $5,194

Question 14

The expenses of advertising merchandise, making sales, and delivering goods to customers are known as:

Answer 14

Selling expenses

Question 15

T or F: Merchandise inventory is reported in the long-term assets section of the balance sheet.

Answer 15

False.

Question 16

T or F: Purchases allowances refer to a seller granting a price reduction (allowance) to a buyer of defective or unacceptable merchandise.

Answer 16

True.

Question 17

T or F: Gross profit is also called gross margin.

Answer 17

True.

Question 18

T or F: The net method records an invoice at its net amount (net of any cash discount).

Answer 18

True.

Question 19

T or F: Beginning inventory plus net purchases equals merchandise available for sale.

Answer 19

True.

Question 20

T or F: FOB shipping point means that the buyer accepts ownership when the goods arrive at the buyer’s place of business.

Answer 20

False.