Chapter 4 Solutions

Chapter 04 - Solutions to Exercises - Series A
Note to Instructors: In this chapter the term “net sales” is

used in the income statement for all exercises and problems
using the perpetual method since any sales discounts and
returns and allowances will be reflected in the balance to the
Sales Revenue account.
SOLUTIONS TO EXERCISES - SERIES A - CHAPTER 4
EXERCISE 4-1A
a.
Dixon Consulting
Income Statement
For the Year Ended 2011
Revenue
Consulting Revenue $30,00
0
Expenses
Salaries Expense (19,200
)
Net Income $10,80
0
Dixon Consulting
Balance Sheet
As of the End of the Year 2011
Assets
Cash* $50,800
Total Assets $50,80
0
Liabilities
Notes Payable $40,000
Total Liabilities $40,00
0
Stockholders’ Equity
Retained Earnings $10,800
Total Stockholders’ Equity 10,800
4-6
Total Liab. and Stockholders’ $50,80

Equity 0
*$40,000 + $30,000 - $19,200 = $50,800
4-7
EXERCISE 4-1A a. (cont.)
Dixon Consulting
Statement of Cash Flows
Cash Flows From Operating
Activities:
Inflow from Revenue $30,000
Outflow for Salaries (19,200)
Net Cash Flow from Operating $10,800
Activ.
Cash Flows From Investing -0-

Activities
Cash Flows From Financing

Activities:
Inflow from Loan $40,00
0
Net Cash Flow from Financing 40,000
Activ.
Net Increase in Cash 50,800

Plus: Beginning Cash Balance -0-
Ending Cash Balance $50,800
4-8
Books for Less

Income Statement
Net Sales $30,000
Cost of Goods Sold (16,800
)
Gross Margin 13,200
Expenses
Operating Expenses (2,400)
Net Income $10,800
Books for Less

Balance Sheet
As of the End of the Year 2011
Assets
Cash* $48,600
Merchandise Inventory** 2,200
Total Assets $50,800
Liabilities
Notes Payable $40,000
Total Liabilities $40,000
Retained Earnings $10,800
Total Liab. and Stockholders’ $50,800
Equity
*$40,000 − $19,000 + $30,000 − $2,400 = $48,600
**$19,000 − $16,800 = $2,200
4-9
Books For Less

Activities:
Inflow from Revenue $30,000
Outflow for Inventory (19,000)
Outflow for Operating Expenses (2,400)
Net Cash Flow from Operating $ 8,600
Activities

Activities

Activities:
Inflow from Loan $40,000
Net Cash Flow from Financing 40,000
Activities
Net Increase in Cash 48,600

b. Dixon Consulting is a service business and has service

revenue and expenses. Notice that Books For Less is a
merchandising business and has sales, cost of goods sold
(with the calculation of gross margin), and operating
expenses.
c. The only difference in the balance sheets of the two

businesses is in the type of assets each owns. Dixon’s only
asset is cash, while Books For Less has both cash and
inventory.
d. The cash flows from operating activities section of the

statement of cash flow is different for the two businesses.
4-10
Dixon only had cash outflow for the salaries of $19,200,

while Books For Less had a cash outflow for both the
purchase of inventory and the payment of operating
expenses. Dixon has a larger ending cash balance because
part of Books For Less’ assets are in inventory.
4-11
EXERCISE 4-2A
a.
Kevin Morris Merchandising
General Journal, 2011
Date Account Titles Debit Credit
1. Cash 60,000
Common Stock 60,000
2. Merchandise Inventory 50,000
Cash 50,000
3a. Cash 56,000
Sales Revenue 56,000
3b. Cost of Goods Sold 36,000
Merchandise Inventory 36,000
b.
T-Accounts
Assets = Stockholders’ Equity
Cash Common Stock
1. 60,000 2. 50,000 1. 60,000
3a. Bal. 60,000
56,000
Bal.
66,000
Sales Revenue
Merchandise 3a. 56,000
Inventory
2. 50,000 3b. Bal. 56,000
36,000
Bal.
14,000
Cost of Goods Sold
3b. 36,000
Bal. 36,000
4-12
EXERCISE 4-2A (cont.)

c.
Kevin Morris Merchandising
Income Statement
For the Year Ended December 31, 2011
Net Sales $56,000
Cost of Goods Sold (36,000)
Gross Margin 20,000
Operating Expenses -0-
Net Income $20,000
d. Total assets: $80,000 (Cash $66,000 + Inventory

$14,000).
4-13
EXERCISE 4-3A a.
Kwon Merchandising Company Effect of Events on the Financial Statements
Balance Sheet Income Statement Cash Flows
Assets = Liab. + Stkholders’ Rev. − Exp. = Net Inc.
Equity
Events Cash + A. Rec. + Mdse. =A. Pay. + C. Stk.+Ret.
Inv. Ear.
Beg. Bal. 18,000 + NA + NA = NA + 18,00 + NA NA − NA = NA NA

0
1. Pur. NA + NA + 20,000 =20,000 + NA + NA NA − NA = NA NA
Inv.
2a. Sold NA + 22,500 + NA = NA + NA +22,500 22,50 − NA =22,500 NA
Inv. 0
2b. Inv. NA + NA + (15,000) = NA + NA + (15,00 NA − 15,00 =(15,000 NA
Cost 0) 0 )
3. Pd. AP (12,500 + NA + NA =(12,50 + NA + NA NA − NA = NA (12,500)
) 0) OA
4. Coll. AR 20,000 + (20,000 + NA = NA + NA + NA NA − NA = NA 20,000 OA
)
5. Pd. Exp. (4,000) + NA + NA = NA + NA + (4,000) NA − 4,000 = (4,000) (4,000) OA
End. Bal. 21,500 + 2,500 + 5,000 = 7,500 + 18,00 + 3,500 22,50 − 19,00 = 3,500 3,500 NC
0 0 0
b. $2,500
c. $7,500
d. Sales $22,500
Gross Margin 7,500
Operating Exp. (4,000)
Net Income $ 3,500
4-14
e. Cash Flows From Operating Activities:

Inflow from Customers $20,000
Outflow for Expenses (4,000)
Net Cash Flow from Operating Activities$ 3,500
4-15
f. Net income is $3,500 and net cash flow from operating

activities is $3,500. The fact that they are the same is
simply coincidence. Revenue earned amounted to $22,500
but only $20,000 was collected. Expenses actually incurred
amounted to $19,000, but only $16,500 of the expenses
were paid for. $2,500 more revenue was earned than
collected, and $2,500 more expense was incurred than paid.
This causes the amount of net income and the cash flow
from operating activities to be the same.
4-16
EXERCISE 4-4A
a.
Ben’s Paint Supply
General Journal for 2011
1. Cash 30,000
Common Stock 30,000
Cash 24,000
3a. Cash 22,000
4. Advertising Expense 1,600
Cash 1,600
b.
T-Accounts
Cash Common Stock Sales Revenue
1. 30,000 2. 1. 30,000 3a.
24,000 22,000
3a. 4. 1,600 Bal. Bal.
22,000 30,000 22,000
Bal.
26,400
Cost of Goods Sold
Mdse. Inventory 3b.
13,000
2. 24,000 3b. Bal.
13,000 13,000
Bal.
11,000
Advertising
Expense
4-17
4. 1,600
Bal. 1,600
4-18

c.
Ben’s Paint Supply
Trial Balance
December 31, 2011
Account Titles Debit Credit
Cash $26,400
Common Stock $30,000
Cost of Goods Sold 13,000
Advertising Expense 1,600
Totals $52,000 $52,000
4-19
EXERCISE 4-5A
a. FOB destination
b. FOB shipping point
c. FOB shipping point
d. FOB destination
4-20
EXERCISE 4-6A
a.
Calculation of Ending Inventory
Beginning balance in inventory $ 6,200
From item 1:
Cost of inventory 22,500
Transportation-in 400
Purchase discount ($22,500 x .01) (225)
From item 2
Cost of inventory 24,000
Total cost of inventory 52,875
Cost of inventory sold (48,000)
Ending balance in inventory $ 4,875
b. Marino is responsible for the transportation-out costs.
c.
Net Sales $64,000
Cost of goods sold (48,000)
Gross Margin 16,000
4-21
EXERCISE 4-7A
a.
The Copy Shop
Accounts Payable 4,100
2. Merchandise Inventory 300
Cash 300
3. Accounts Payable 500
Merchandise Inventory 500
5a. Cash 4,750
Sales Revenue 4,750
6. Transportation-out 200
Cash 200
7. Accounts Payable 3,000
Cash 3,000
4-22

b.
The Copy Shop
T-Accounts
Assets = Liabilities + Stockholders’
Equity
Cash Accounts Payable Common Stock
Bal. 6,000 3. 500 1. 4,100 Bal. 7,500
5a. 4,750 2. 300 4. 250
6. 200 7. 3,000 Retained Earnings
7. 3,000 Bal. 350 Bal. 1,500
Bal. 7,250
Sales Revenue
Mdse. Inventory 5a. 4,750
Bal. 3,000 Bal. 4,750
1. 4,100 3. 500
2. 300 4. 250 Cost of Goods Sold
5b. 5b.
2,750 2,750
Bal. 3,900 Bal.
2,750
Transportation-
out
6. 200
Bal. 200
4-23

c.
The Copy Shop
Income Statement
Net Sales $4,750
Gross Margin 2,000
Operating Expenses
Transportation-out (200)
Net Income $1,800
The Copy Shop

Activities:
Outflow for Merchandise (3,300)
Inventory
Outflow for Expenses (200)
Net Cash Flow from Operating $ 1,250
Activities
Activities
Cash Flows From Financing -0-
Activities
Net Change in Cash 1,250
Plus: Beginning Cash Balance 6,000
4-24
d. The difference between net income and net cash flow from
operating activities is caused by the shop not selling all the
inventory that it purchased during the period. The cash
payment for inventory is included in the statement of cash
flows, but only the portion of that payment allocated to
goods actually sold is included on the income statement.
4-25
EXERCISE 4-8A
Transaction Debited to
Inventory
a. Purchase of inventory Yes
b. Allowance for damaged No
inventory
c. Transportation-in Yes
d. Cash discount on goods sold No
e. Transportation-out No
f. Purchase of office supplies No
4-26
EXERCISE 4-9A
a.
Transactio Period Product Not
n Costs Costs Applicable
1. 
2. 
3. 
4. 
5. 
6. 
7. 
8. 
9. 
10. 
4-27

b.
Cramer Co. Horizontal Statements Model for 2011
Balance Sheet Income Statement Statement

of
Assets = Liab. + Stkholders’ Rev. − Exp. =Net Inc. Cash Flows
Equity
Cash + A. Rec. + Mdse. = A. Pay. C. Stk. + Ret.
+
Inv. Ear.
1. Stock 10,000 + NA + NA = NA +10,00 + NA NA − NA = NA 10,000 FA
0
2. Pur Inv. NA + NA + 18,000 = 18,000 + NA + NA NA − NA = NA NA
3. Freight (500)+ NA + 500 = NA + NA + NA NA − NA = NA (500) OA
4. Ret. Inv. NA + NA + (4,000) =(4,000) + NA + NA NA − NA = NA NA
5a. Sold NA + 44,000 + NA = NA + NA + 44,000 44,00 − NA =44,000 NA
Inv. 0
5b. Cost NA + NA +(14,300) = NA + NA + (14,300 NA − 14,300 =(14,300 NA
) )
6. Pd. Frt. (100)+ NA + NA = NA + NA + (100) NA − 100 = (100) (100) OA
7. Coll. AR 16,500 +(16,500 + NA = NA + NA + NA NA − NA = NA 16,500 OA
)
8. Pd. AP (12,000 + NA + NA =(12,00 + NA + NA NA − NA = NA(12,000)
) 0) OA
9. Pd. Exp. (2,200)+ NA + NA = NA + NA + (2,200) NA − 2,200 = (2,200) (2,200) OA
10. Pd. (4,400)+ NA + NA = NA + NA + (4,400) NA − 4,400 = (4,400) (4,400) OA
Exp.
End. Bal. 7,300 + 27,500 + 200 = 2,000 +10,00 + 23,000 44,00 − 21,000 =23,000 7,300 NC
0 0
4-28
EXERCISE 4-10A
a. Purchase $31,000
Less: return (6,400)
Gross due (subject of the discount)24,600
Discount percentage x 2%
Amount of discount $ 492
Gross amount due $24,600

Less: discount ( 492)
Net amount due $24,108
b.
Bob’s Imports Effect of Events on the Financial Statements
Events Balance Sheet Income Statement Stmt. of Cash
Flows
Assets = Liab. +Stkholders’ Rev. − Exp. = Net
Equity Inc.
Cash + Mdse. = A. Pay. + C. + Ret.
Inv. Stk. Ear.
1. Pur. NA + 31,000 = 31,000 + NA + NA NA − NA = NA NA
Inv.
2. Ret. NA + (6,400) = (6,400) + NA + NA NA − NA = NA NA
Inv.
3a. Disc. NA + (492) = (492) + NA + NA NA − NA = NA NA
3b. Pd. (24,108 + NA = (24,108 + NA + NA NA – NA = NA (24,108) OA
AP ) )
4-29
c. $24,600; he would not be eligible for the discount.
d.
Bob’s Imports Effect of Events on the Financial Statements
Events Balance Sheet Income Statement Stmt. Of Cash Flows
Assets = Liab. +
Stkholders’ Rev. − Exp. = Net Inc.
Equity
Cash + Mdse. = A. Pay. + C. +Ret.
Inv. Stk. Ear.
3. Pd. AP (24,600 + NA =(24,600) + NA + NA − NA = NA (24,600) OA
)
e. Watches, Inc. would be willing to give a discount for prompt payment of the
account. The quicker Watches Inc. can convert accounts receivable into cash, the
quicker the company can pay its debts or buy additional inventory.
4-30
EXERCISE 4-11A
Even Even
t t Asset = Liab + S. Rev − Exp = Net Cash
No. Type s . Equity . . Inc. Flow
1. AS + + NA NA NA NA NA
2. AE +− NA NA NA NA NA − OA
3a. AS + NA + + NA + NA
3b. AU − NA − NA + − NA
4. AU − − NA NA NA NA NA
5a. AS + NA + + NA + + OA
5b. AU − NA − NA + − NA
6. AU − − NA NA NA NA − OA
7. AU − NA − NA + − − OA
8. AE +/− NA NA NA NA NA + NA
9. AU − NA − NA + − − OA
10. AE +− NA NA NA NA NA − OA
4-31
EXERCISE 4-12A
a.
Grice Incorporated
Income Statement
For the year ended December 31, 2011
Sales Revenue $275,000
Gross Margin 75,000
Expenses
Net Operating Income 23,000
Non-Operating Items
Gain on the Sale of Land 45,000
Net Income $68,000
b.
Grice Incorporated
Income Statement
For the year ended December 31, 2012
Gross Margin 82,500
Expenses
Net Operating Income 25,300
Non-Operating Items -0-
Net Income $25,300
4-32
c. Net income decreased by 62.8%.
d. If they look at operating income, then this result would

have been expected. Shareholders must be careful when
only looking at the Net Income amount because there may
be nonrecurring items below Operating Income.
4-33
EXERCISE 4-13A
a.
Brislin Merchandisers
Cost of inventory purchase $30,000
Minus Purchase returns (2,500)
Minus Purchase discounts ($27,500 (550)
x .02)
Total cost of the inventory $26,950
b
Brislin Merchandisers
Income Statement
Net Sales $43,000
Gross Margin 16,050
Operating Expenses
Selling and administrative (8,000)
expenses
Operating Income 8,050
Nonoperating items
Interest expense (1,000)
Loss on sale of land (2,000)
Net Income $ 5,050
c. The interest expense would be reported in the operating

activities section of the statement of cash flows.
d. The full sales price of the land $10,000 would be shown as

a cash inflow from investing activities on the statement of
cash flows.
e. A loss occurs from activities that are not part of the

normal recurring operations of the business. Expenses
4-34
are normal recurring sacrifices that are incurred to

produce revenue.
4-35
EXERCISE 4-14A
a.
The Little Black Dress Shop
Financial Statements Model
Event Cash + Accts. Commo Retaine Rev./ Cash
No. Inv. + Land + Pay. = n + d Gain ─ Exp. = Net Inc. Flow
Stock Earning
s
Bal. 50,000 + 6,000 + 10,000 -0- = 36,000 + 30,000 ─ =
1 NA + 32,000 + NA 32,000 = NA + NA NA ─ NA = NA NA
2. (1,200) + 1,200 + NA NA = NA + NA NA ─ NA = NA OA (1,200)
3. NA + (1,000) + NA (1,000) = NA + NA NA ─ NA = NA NA
4a* NA + (620) + NA (620) = NA + NA NA ─ NA = NA NA
4b (30,380) + NA + NA (30,380)= NA + NA NA ─ NA = NA OA(30,380)
5a 42,000 + NA + NA NA = NA + 42,000 42,000 ─ NA = 42,000 OA 42,000
5b NA + (30,000+ NA NA = NA + (30,000) NA ─ 30,000 = (30,000) NA
)
6 (1,900) + NA + NA NA = NA + (1,900) NA ─ 1,900 = (1,900) OA (1,900)
7 (8,000) + NA + NA NA = NA + (8,000) NA ─ 8,000 = (8,000) OA (8,000)
8 11,200 + NA + (10,000) NA = NA + 1,200 1,200 ─ NA = 1,200 IA 11,200
Bal. 61,720 + 7,580 + -0- -0- = 36,000 + 33,300 43,200 ─ 39,900 = 3,300 NC 11,720
*($32,000 − $1,000) x .02 = $620
4-36

b.
The Little Black Dress Shop
Income Statement
Net Sales $42,000 100.0
%
Cost of Goods Sold (30,000 71.4
)
Gross Margin 12,000 28.6
Operating Expenses
Selling and Adm. (8,000) 19.0
Expenses
Transportation-Out (1,900) 4.5
Total Operating Expenses (9,900) 23.6
Operating Income 2,100 5.1
Non-Operating Items
Gain on Sale of Land 1,200 2.9
Net Income $3,300 7.9
*Percentages do not add exactly because they have been rounded.
4-37
c. All other things being equal, the higher the gross margin
percentage, the higher the sales prices. Since the gross
margin percentage decreased from 34% to 28.6% the data
suggest that TLBDS lowered its sales prices.
d. $2,205 [$2,100 + (.05 x $2,100)]. Note the gain is not

expected to recur.
4-38
EXERCISE 4-15A
Single-Step Income Statement:

Good Foods Store
Income Statement
Net Sales $1,000
Expenses
Cost of Goods Sold $600
Advertising Expense 200
Interest Expense 70
Salaries Expense 130
Supplies Expense 110
Loss on Sale of Land 25
Total Expenses (1,135)
Net Income (Loss) $ (135)
Multistep Income Statement:

Good Foods Store
Income Statement
Net Sales $1,000
Cost of Goods Sold (600)
Gross Margin 400
Operating Expenses
Advertising Expense $200
Salaries Expense 130
Supplies Expense 110
Total Operating Expenses (440)
Operating Income (Loss) (40)
Non-Operating Expenses
Interest Expense (70)
Loss on Sale of Land (25)
Net Income (Loss) $ (135)
4-39
EXERCISE 4-16A
a.
Mia Sales
T-Accounts for 2011
Cash Common Stock Sales Revenue
1. 50,000 2. 1.50,000 3a.
21,000 26,500
3a. 26,500 Bal. Bal.
50,000 26,500
Bal.
55,500
Cost of Goods Sold
Mdse. Inventory 3b.
12,500
2. 21,000 3b. 4. 600
12,500
Bal. 8,500 Bal.
13,100
4. 600 (8,500 − 7,900)
Bal. 7,900
b.
Mia Sales
Income Statement
For Year Ended December 31, 2011
Net Sales $26,500
)
Gross Margin 13,400
Operating Expenses -0-
Net Income $13,400
4-40
EXERCISE 4-16A b. (cont.)
Mia Sales
Balance Sheet
As of December 31, 2011
Assets
Cash $55,500
Liabilities $
-0-
Retained Earnings 13,400
Total Liab. And Stockholders’ $63,400
Equity
c. Lost, stolen, or damaged inventory may not have been

accounted for. When management discovers differences in
the book balance of the inventory and the physical count of
the inventory, adjusting entries are made to the books to
reduce the inventory account to its actual balance. For
control purposes, it is important for management to know
the amount of lost or damaged inventory.
4-41
EXERCISE 4-17A
a.
Cain Company
1a. Accounts Receivable 74,500
Cash 400
3a. Sales Returns 3,800
Accounts Receivable 3,800
3b. Merchandise Inventory 2,000
4. Sales Discounts 1,000
5. Cash 52,000
4-42

b.
Sans Company
T-Accounts for 2011
Cash Common Stock Retained Earnings
Bal. 18,000 Bal. Bal.
50,000 28,000
5. 52,000 2. 400
Bal. 69,600 Sales Revenue
1a.
74,500
Accounts
Receivable
1a. 74,500 3a. 3,800 Bal.
74,500
4. 1,000
5.52,000 Cost of Goods Sold
Bal. 17,700 1b. 3b. 2,000
38,200
Bal.
36,200
Mdse. Inventory
Bal. 60,000 Transportation-out
3b. 2,000 1b. 2. 400
38,200
Bal. 23,800 Bal. 400
Sales Returns
3a. 3,800
4
1,000
Bal. 4,800
4-43

c.
Cain Company
Financial Statements
Income Statement
Net Sales $69,700
Gross Margin 33,500
Operating Expenses
Net Income $33,100
Balance Sheet
Assets
Cash
$69,600
0
Liabilities $
-0-
Common Stock
$50,000
Total Liabilities and $111,10
Stockholders’ Equity 0
4-44
EXERCISE 4-17A c. (cont.)
Cain Company
Activities:
Activities 0
Activities
Activities
0
d. Cain Company would grant an allowance to Jones for several

reasons. First, Jones already has the goods and if he keeps
them it will save the expense of a return. If the goods are
damaged, then Cain will either have to repair the
merchandise or sell them to another customer at a reduced
price. Also, assuming Jones can sell the goods, he already
has them in stock and will not have to wait on another
shipment. Also, he is getting the goods at a reduced price.
This arrangement can benefit both buyer and seller.
4-45
EXERCISE 4-18A
a. Gross Margin Percentages:
Catrow: 25%($ 8,150 ÷ $32,600)

Furman: 45%($38,790 ÷ $86,200)
Return-on-Sales Ratios:
Catrow: 5% ($1,630 ÷ $32,600)

Furman: 10% ($8,620 ÷ $86,200)
Based on the gross margin percentages, Furman is the “high-end

retailer.” Furman is obviously marking up the price of merchandise
by a greater percentage than Catrow.
b. Return-on-Equity Ratios:
Catrow: 11.6% ($1,630 ÷ $14,100)

Furman: 9.0% ($8,620 ÷ $95,800)
From the viewpoint of the owners, Catrow was more profitable.
4-46
EXERCISE 4-19A
a.
Common Size Income Statements
Davis % Long %
Sales $1,500,000 100.0 $1,500,000 100.0

Cost of Goods Sold (1,050,000) (70.0) (1,125,000) (75.0)
Gross Margin 450,000 30.0 375,000 25.0
Operating Expenses (350,000) (23.3) (250,000) (16.7)

Net Income $ 100,000 6.7 $ 125,000 8.3
b. Davis Company:
Return on assets: $100,000 ÷ $1,800,000 = 5.5%

Return on equity: $100,000 ÷ $ 720,000 = 13.9%
Long Company:
Return on assets: $125,000 ÷ $1,800,000 = 6.9%

Return on equity: $125,000 ÷ $ 720,000 = 17.4%
c. Long Co., because it has the higher return-on-equity percentage.
d. Davis Co. appears to be the high-end retailer because it has the

higher gross margin percentage. Long Co. appears to be the
discounter because it has the lower gross margin percentage.
4-47
EXERCISE 4-20A (Appendix)
Beginning Mdse. $ 2,400

Inventory
Plus: Merchandise 13,000
Purchased
Goods Available for Sale 15,400
Less: Ending Mdse. (3,600)
Inventory
Cost of Goods Sold $11,80
0
a. Goods Available for Sale $15,400
b. Cost of Goods Sold $11,800
c. Merchandise Inventory on year-end balance sheet $3,600
4-48

a.
Sunset Retailers
Schedule of Cost of Goods Sold
Beginning Merchandise Inventory $ 24,900
Plus: Purchases 306,400
Plus: Transportation-in 1,820
Less: Purchase Returns and (12,400)
Allowances
Cost of Goods Available for Sale 320,720
Less: Ending Merchandise Inventory (24,800)
0
b.
Sunset Retailers
Income Statement
For Year Ended 2012
Net Sales Revenue* $713,63
0
0)
Gross Margin 417,710
Net Income $366,31
0
*Sales, $720,000 − Sales Returns and Allow., $6,370 = Net
Sales, $713,630
4-49

a.
Tops Gift Shop
1. Cash 45,000
Common Stock 45,000
Common Stock 2,500
3. Purchases 46,500
4. Advertising Expense 2,750
Cash 2,750
5. Cash 82,500
6. Salaries Expense 8,000
Cash 8,000
Cash 30,000
8. Cost of Goods Sold* 42,000
(adj.)
(Ending)
Purchases 46,500
(owner
contribution)
*Cost of Goods Sold Calculation:

Beginning Merchandise Inventory$ -0-
Owner Contribution 2,500
Purchases 46,500
Goods Available for Sale 49,000
Less: Ending Merchandise Inventory ( 7,000)
4-50
4-51

b.
Tops Gift Shop
T-Accounts for 2012
Equity
1. 45,000 4. 2,750 7. 30,000 3. 46,500 1. 45,000
5. 82,500 6. 8,000 Bal. 2. 2,500
16,500
7. 30,000 Bal.47,500
Bal. 86,750
Sales Revenue
Merchandise 5. 82,500
Inventory
2. 2,500 8. 2,500 Bal.82,500
8. 7,000
Bal. 7,000 Cost of Goods Sold
8. 42,000
Bal. 42,000
Purchases
3. 46,500 8. 46,500
Bal. -0-
Advertising Expense
4. 2,750
Bal. 2,750
Salaries Expense
6. 8,000
Bal.8,000
4-52

c.
Tops Gift Shop
Income Statement
Net Sales $82,500
Gross Margin 40,500
Operating Expenses
Advertising Expense $ 2,750
Salaries Expense 8,000
Total Operating (10,750)
Expenses
Net Income $29,750
Statement of Changes in Stockholders’ Equity

Beginning Common $ -0-
Stock
Plus: Stock Issued 47,500
Ending Common Stock $47,500
Beginning Retained $ -0-
Earnings
Plus: Net Income 29,750
Ending Retained 29,750
Earnings
Total Stockholders’ $77,250
Equity
4-53
EXERCISE 4-22A c. (cont.)
Tops Gift Shop

Balance Sheet
Assets
Cash $86,750
Liabilities
Accounts Payable $16,500
Total Liabilities and Stockholders’ $93,750
Equity


Activities:
Outflow for Expenses (10,750)
Activities
Activities
Activities:
Inflow from Stock Issue 45,000
4-54

4-55

d.
Tops’s Gift Shop
General Journal
Closing Entries
cl Sales Revenue 82,500
cl Retained Earnings 52,750
4-56
EXERCISE 4-22A d. (cont.)
Topss Gift Shop

T-Accounts
Equity
Bal. Bal. Bal.
86,750 16,500 47,500
Retained Earnings
Merchandise cl 52,750 cl 82,500
Inventory
Bal. 7,000 Bal.
29,750
Sales Revenue
Bal.
82,500
cl 82,500
Bal. -0-
Cost of Goods Sold

Bal.
42,000
cl 42,000
Bal. -0-
Advertising Expense
Bal. 2,750
cl 2,750
Bal. -0-
Salaries Expense
Bal. 8,000
cl 8,000
Bal. -0-
4-57

e.
Tops Gift Shop
Post-Closing Trial Balance
Cash $86,750
Accounts Payable $16,500
Common Stock 47,500
Totals $93,750 $93,750
f. Less recordkeeping is usually required when the periodic

method is used. There is no requirement to remove the cost
of items from inventory when the goods are sold. The cost
is accounted for at the end of the period when goods still on
hand are counted and the adjustment is made.
g. Capital acquired from the stockholders does not have to be

cash. In this problem, one of the stockholders contributed
inventory to the business in exchange for stock. This
amount is shown as stock issued on the statement of
changes in stockholders’ equity, but since it was not a cash
contribution, it does not show up on the statement of cash
flows.
4-58
SOLUTIONS TO PROBLEMS - SERIES A - CHAPTER 4
PROBLEM 4-23A
T-accounts are provided for the instructor’s use:
Ramsey Company
T-Accounts 2011, 2012, and 2013
Cash Common Stock Retained Earnings
2011 60,000 24,000 2011 cl 18,900 2011 cl
60,000 26,000
26,000 5,500 Bal. 7,100
Bal. 56,500 cl 26,700 2012 cl
30,000
2012 30,000 12,000 Bal. 10,400
8,200 cl 30,100 2013 cl
36,000
Bal. 66,300 Bal. 16,300
2013 20,500
36,000
10,100 Sales Revenue
Bal. 71,700 cl 26,000 2011 26,000
Bal. -0-
Merchandise Inv. cl 30,000 2012 30,000
2011 24,000 13,400 Bal. -0-
Bal. 10,600 cl 36,000 2013 36,000
2012 12,000 18,500 Bal. -0-
Bal. 4,100
2013 20,500 20,000
Bal. 4,600 Cost of Goods Sold
2011 cl 13,400
13,400
Bal. -0-
2012 cl 18,500
18,500
Bal. -0-
2013 cl 20,000
20,000
Bal. -0-
Selling and Adm. Exp.

2011 5,500 cl 5,500
Bal. -0-
2012 8,200 cl 8,200
Bal. -0-
4-59
2013 cl 10,100
10,100
Bal. -0-
4-60
PROBLEM 4-23A (cont.)
Ramsey Company
Income Statements
2011 2012 2013
Net Sales $26,000 $30,00 $36,000
0
Cost of Goods Sold (13,400) (18,500 (20,000)
)
Gross Margin 12,600 11,500 16,000
Operating Expenses
Selling and Admin. (5,500) (8,200) (10,100)
Expense
Net Income $ 7,100 $ $ 5,900
3,300
Balance Sheets
Assets
Cash $56,500 $66,300 $71,700
Merchandise Inventory 10,600 4,100 4,600
Total Assets $67,100 $70,400 $76,300
Liabilities $ -0- $ $
-0- -0-
Common Stock 60,000 60,000 60,000
Retained Earnings 7,100 10,400 16,300
Total Stockholders’ Equity 67,100 70,400 76,300
Total Liab. and Stkholders’ $67,100 $70,400 $76,300
Equity
4-61
PROBLEM 4-24A
Event Freight Costs Period/Product

Paid
a. $700 Product
b. $-0- NA
c. $-0- NA
d. $900 Period
4-62
PROBLEM 4-25A
Event Product Period Costs

Costs
a. 
b. 
c. 
d. 
e. 
f. 
g. 
h. 
i. 
j. 
4-63
PROBLEM 4-26A
a. & b.
Hall Sales Company
Income Statement
For the Years Ended December 31, 2011 and 2012
2011 2012
Net Sales $50,000 100% $50,000 100
%
Cost of Goods Sold (20,000) 40 (22,500) 45
Gross Margin 30,000 60 27,500 55
Operating Expenses (12,500) 25 (15,000) 30
Operating Income 17,500 35 12,500 25
Gain on Sale of Land -0- 8,000 16
Net Income $17,500 35% $20,500 41%
c. Sales have remained flat while expenses (cost of goods sold

and operating expenses) have risen. The gain by definition
is not expected to recur. If the operating trends continue,
net income will definitely fall in 2013.
4-64
PROBLEM 4-27A
a.
D & L Enterprises
Effect of Events on the Financial Statements for 2011
Event Even Balance Sheet Income Statement Statement of
t
No. Type Assets = Liab. + S. Rev. − Exp. = Net Inc. Cash Flows
Equity
1a. AS + + NA NA NA NA NA
1b. AE +− NA NA NA NA NA − OA
2. AU − − NA NA NA NA NA
3a. AU − − NA NA NA NA NA
Disc.
3b. AU − − NA NA NA NA − OA
Pay.
4a. AS + NA + + NA + NA
Sale
4b. AU − NA − NA + − NA
Cost
5a. AU − NA − − NA − − OA
Ret.
5b. AS + NA + NA − + NA
Ret.
6. Frt. AU − NA − NA + − − OA
7a. AU − NA − − NA − NA
Disc.
7b. AE +− NA NA NA NA NA + OA
Coll.
8. Inv. AU − NA − NA + − NA
Adj.
4-65
PROBLEM 4-27A (cont.) b.
D & L Enterprises General Journal -2011
1a. Merchandise Inventory 5,600
1b. Merchandise Inventory 500
Cash 500
3a. Accounts Payable [($5,600 – $400) 104
x .02]
3b. Accounts Payable ($5,600 – $400 – 5,096
$102)
Cash 5,096
4a. Accounts Receivable 9,000
Sales Revenue 9,000
5a. Sales Revenue 840
Cash 840
5b. Merchandise Inventory 520
Cost of Goods Sold 520
Cash 600
7a. Sales Revenue 180
Accounts Receivable ($9,000 x . 180
02)
7b. Cash 8,820
Accounts Receivable ($9,000 – 8,820
$180)
8. Cost of Goods Sold (Inventory 316

Loss)1
4-66
1
$2,000 + $5,600 +$500 – $400 – $104 –$6,000 + $520 = $2,116 – $1,800 =
$316
4-67
c.
D & L Enterprises
T-Accounts for 2011
Assets = Liabilities + Stockholders’ Equity

Bal 8,400 1b 500 2. 400 1a 5,600 Bal 8,000
. . . .
7b. 8,820 3b 5,096 3a. 104
.
5a 840 3b 5,096
. .
6. 600 Ba -0- Retained Earnings
l.
Bal 10,184 Bal 2,400
. .
cl 6,396 cl 7,980
Bal 3,984
.
Merchandise
Inventory
Bal 2,000 Sales Revenue
.
1a. 5,600 2. 400 5a. 840 4a. 9,000
1b. 500 3a 104 7a. 180
.
5b. 520 4b 6,000 Bal 7,980
. .
Bal 2,116 cl 7,980
.
8. 316 Bal -0-
.
Bal 1,800
.
Cost of Goods Sold
4b 6,000
.
Accounts 8. 316 5b. 520
Receivable
4a. 9,000 7a 180 Ba 5,796
. l.
7b. 8,820 cl 5,796
Bal -0- Ba -0-
. l.
Transportation-out
6. 600
Ba 600
4-68
l.
cl 600
Ba -0-
l.
4-69
PROBLEM 4-27A
d.
D & L Enterprises
Income Statement
Net Sales $7,980
Gross Margin 2,184
Operating Expenses
Operating Income $1,584

Beginning Common Stock $8,000
Plus: Stock Issued -0-
Beginning Retained $2,400
Earnings
Ending Retained Earnings 3,984
Total Stockholders’ Equity $11,984
4-70
PROBLEM 4-27A d. (cont.)
D & L Enterprises
Balance Sheet
Assets
Cash $10,184
Total Assets $11,98
4
Liabilities $
-0-
Common Stock $ 8,000
Total Liabilities and Stockholders’ $11,98
Equity 4

Activities:
Inflow from Customers* $7,980
Outflow for Inventory** (5,596)
Net Cash Flow from Operating $
Activities 1,784
Activities
Activities
4-71

4
*(7b) $8,820– (5a) $840 = $7,980
**(1b) $500 + (3b) $5,096 = $5,596
4-72

e.
Closing Entries
Dec. Sales Revenue 7,980
31
Dec. Retained Earnings 6,396
31
Transportation-out 600
See T-Accounts in part c. for closing entries.
D & L Enterprises
Post Closing Trial Balance
December 31, 2011
Cash $10,184
Common Stock $ 8,000
Totals $11,984 $11,984
4-73
PROBLEM 4-28A (Appendix)

a.
Scoggins Sales Co.
For Year Ended December 31, 2011
Beginning Merchandise $ 18,000

Inventory
Purchases 150,000
Purchase Returns and (2,700)
Allowances
Transportation-in 6,200
Cost of Goods Available for 171,500
Sale
Less: Ending Merchandise (20,100)
Inventory
4-74
PROBLEM 4-28A (cont.) (Appendix)

b.
Scoggins Sales Co.
Income Statement
Sales
Sales Returns and (8,000)
Allowances
Net Sales $312,000
Gross Margin 160,600
Operating Expenses
Miscellaneous Expense 800
Transportation-out 10,800
Rent Expense 18,000
Utilities Expense 11,200
Total Operating Expenses (104,200)
Operating Income 56,400
Non-Operating Items
Interest Expense (5,000)
Gain on Sale of Land 4,000
Net Income $ 55,400
4-75
PROBLEM 4-28A (cont.) (Appendix)

c.
Scoggins Sales Co.
Income Statement
Sales
Sales Returns and (8,000)
Allowances
Gain on Sale of Land 4,000
Net Sales $316,000
Operating Expenses
Miscellaneous Expense 800
Transportation-out 10,800
Rent Expense 18,000
Interest Expense 5,000
Utilities Expense 11,200
Total Expenses (260,600)
Net Income $ 55,400
4-76
PROBLEM 4-29A (Appendix)

a.
Reeves Hardware
Event Account Titles Debit Credit
1. Land 8,000
Cash 8,000
2. Purchases 23,000
3. Transportation-in 230
Cash 230
Purchase Returns and Allow. 2,000
5. Cash 27,000
6. Accounts Receivable 50,000
7a. Accounts Payable [$23,000 – $2,000) x 420
.02]
Purchase Discounts 420
7b. Accounts Payable ($23,000 – $2,000 – 20,580
$420)
Cash 20,580
8. Selling Expenses 1,200
Cash 1,200
9a. Sales Discounts ($35,000 x .01) 350
Accounts Receivable 350
9b. Cash ($35,000 − $350) 34,650
4-77
PROBLEM 4-29A a. (cont.)
Reeves Hardware
Event Account Titles Debit Credit
10. Cash 12,000
11. Operating Expenses 3,200

Cash 3,200
12. Cost of Goods Sold2 50,810
(Ending)
Purchase Discounts 420
Purchase Returns and 2,000
Allowances
Purchases 23,000
(Beginning)
1
$45,000 ÷ 40 = $1,125 per year.
2
Cost of Goods Sold: Beginning Merchandise Inventory
$60,000
Purchases 23,000
Purchase Ret. and Allow. (2,000)
Purchase Discounts (420)
Cost of Goods Available 80,810
Less: Ending Merchandise Inventory
(30,000)
4-78
PROBLEM 4-29A (cont.) b.
Reeves Hardware
Bal 14,000 1. 8,000 4. 2,000 Bal 5,000 Bal 70,000
. . .
5. 27,000 7a. 420 2. 23,000
9b. 34,650 3. 230 7b 20,580 Retained Earnings
.
10. 12,000 7b 20,580 Bal 5,000 Bal 8,000
. . .
8. 1,200
11 3,200 Sales Revenue
.
5. 27,000
Bal 54,440 6. 50,000
.
Bal 77,000
.
Accounts Receivable
Bal 9,000 9a 350 Sales Discounts
. .
6. 50,000 9b 34,650 9a 350
. .
10 12,000
.
Bal 12,000
.
Purchases
Merchandise 2. 23,000 12. 23,000
Inventory
Bal 60,000 Ba -0-
. l.
12. 30,000 12. 60,000
Bal 30,000 Purchase Returns &
. Allow.
12 2,000 4. 2,000
.
Land Ba -0-
l.
1. 8,000
Bal 8,000 Purchase Discounts
.
12 420 7a. 420
.
Ba -0-
l.
Transportation-in
3. 230 12. 230
4-79
Ba -0-
l.
Cost of Goods Sold

12 50,810
.
Selling Expenses
8. 1,200
4-80
Operating Expense
11 3,200
.
4-81

c.
Reeves Hardware
Beginning Mdse. Inventory $60,000
1/1/2011
Purchases 23,000
Purchase Discounts (420)
Purchase Returns and Allow. (2,000)
Cost of Goods Available for $80,810
Sale
Ending Merchandise Inventory (30,000)
4-82
PROBLEM 4-29A c. (cont.)
Reeves Hardware
Income Statement
Revenue
Sales Discounts (350)
Net Sales $76,650
Gross Margin 25,840
Operating Expenses
Selling Expenses 1,200
Operating Expense 3,200
Total Operating Expense (4,400)
Net Income $21,440

Beginning Common Stock $70,000
Plus: Stock Issued -0-
Beginning Retained $ 8,000
Earnings
Ending Retained Earnings 29,440
Total Stockholders’ Equity $99,440
4-83
Reeves Hardware
Balance Sheet
Assets
Cash $54,440
Land 8,000
0
Liabilities
Accounts Payable $ 5,000
Total Liabilities $ 5,000
Common Stock 70,000
Total Stockholders’ 99,440
Equity
Total Liab. and Stk. $104,44
Equity 0
4-84
Reeves Hardware
Activities:
Inflow from Customers1 $73,650
Outflow for Inventory2 (20,810)
Outflow for Expenses3 (4,400)
Activities 0
Cash Flows From Investing
Activities:
Outflow for Purchase of Land (8,000)
Net Cash Flow from Investing (8,000)
Activities
Activities:
Net Cash Flow from Financing -0-
Activities
0
1
(5b) $27,000 + (9b) $34,650 + (10) $12,000 = $73,650
2
(3) $230 + (7b) $20,580 = $20,810
3
(8) $1,200 + (11) $3,200 = $4,400
4-85

Chapter 4 Solutions

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Chapter 4 Solutions

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Chapter 04 - Solutions to Exercises - Series A

Note to Instructors: In this chapter the term “net sales” is

SOLUTIONS TO EXERCISES - SERIES A - CHAPTER 4

Total Liab. and Stockholders’ $50,80

EXERCISE 4-1A a. (cont.)

Cash Flows From Investing -0-

Cash Flows From Financing

Net Increase in Cash 50,800

EXERCISE 4-1A a. (cont.)

Books for Less

Books for Less

EXERCISE 4-1A a. (cont.)

Books For Less

Cash Flows From Investing -0-

Cash Flows From Financing

Net Increase in Cash 48,600

b. Dixon Consulting is a service business and has service

c. The only difference in the balance sheets of the two

d. The cash flows from operating activities section of the

Dixon only had cash outflow for the salaries of $19,200,

EXERCISE 4-2A (cont.)

d. Total assets: $80,000 (Cash $66,000 + Inventory

Beg. Bal. 18,000 + NA + NA = NA + 18,00 + NA NA − NA = NA NA

e. Cash Flows From Operating Activities:

EXERCISE 4-3A (cont.)

f. Net income is $3,500 and net cash flow from operating

EXERCISE 4-4A (cont.)

b. Marino is responsible for the transportation-out costs.

EXERCISE 4-7A (cont.)

EXERCISE 4-7A (cont.)

The Copy Shop

EXERCISE 4-9A (cont.)

Balance Sheet Income Statement Statement

Gross amount due $24,600

EXERCISE 4-10A (cont.)

c. $24,600; he would not be eligible for the discount.

EXERCISE 4-12A (cont.)

c. Net income decreased by 62.8%.

d. If they look at operating income, then this result would

c. The interest expense would be reported in the operating

d. The full sales price of the land $10,000 would be shown as

e. A loss occurs from activities that are not part of the

are normal recurring sacrifices that are incurred to

*($32,000 − $1,000) x .02 = $620

EXERCISE 4-14A (cont.)

Operating Income 2,100 5.1

*Percentages do not add exactly because they have been rounded.

EXERCISE 4-14A (cont.)

d. $2,205 [$2,100 + (.05 x $2,100)]. Note the gain is not

Single-Step Income Statement:

Multistep Income Statement:

EXERCISE 4-16A b. (cont.)

c. Lost, stolen, or damaged inventory may not have been

EXERCISE 4-17A (cont.)

EXERCISE 4-17A (cont.)

EXERCISE 4-17A c. (cont.)

d. Cain Company would grant an allowance to Jones for several

a. Gross Margin Percentages:

Catrow: 25%($ 8,150 ÷ $32,600)

Catrow: 5% ($1,630 ÷ $32,600)

Based on the gross margin percentages, Furman is the “high-end

Catrow: 11.6% ($1,630 ÷ $14,100)

From the viewpoint of the owners, Catrow was more profitable.