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0. 5. Accounting for Merchandising Businesses. 0. 5-1. Objective 1. Distinguish between the activities and financial statements of service and merchandising businesses. 0. 5-1. Service Business. Fees earned $XXX Operating expenses –XXX Net income $XXX. 0. 5-1.

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5

Accounting for Merchandising Businesses


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5-1

Objective 1

Distinguish between the activities and financial statements of service and merchandising businesses.


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5-1

Service Business

Fees earned $XXX

Operating expenses –XXX

Net income $XXX


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5-1

Merchandising Business

Sales $XXX

Cost of Merchandise Sold –XXX

Gross Profit $XXX

Operating Expenses –XXX

Net Income $XXX


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5-1

When merchandise is sold, the revenue is reported as sales, and its cost is recognized as an expense called cost ofmerchandise sold.


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5-1

The cost of merchandise sold is subtracted from sales to arrive at gross profit. This amount is called gross profit because it is the profit before deducting the operating expenses.


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Follow My Example 1-1

Follow My Example 5-1

Example Exercise 5-1

$137,000. Under the cost concept, the land should be recorded at the cost to Gallatin Repair Service.

31

  • 0

1-2

5-1

On August 25, Gallatin Repair Service extended an offer of $125,000 for land that had been priced for sale at $150,000. On September 3, Gallatin Repair Service accepted the seller’s counteroffer of $137,000. On October 20, the land was assessed at a value of $98,000 for property tax purposes. On December 4, Gallatin Repair Service was offered $160,000 for the land by a national retail chain. At what value should the land be recorded in Gallatin Repair Service’s records?

During the current year, merchandise is sold for $250,000 cash and for $975,000 on account. The cost of the merchandise sold is $735,000. What is the amount of the gross profit?

The gross profit is $490,000 ($250,000 + $975,000 –$735,000).

10

For Practice: PE 5-1A, PE 5-1B


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5-1

11


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5-2

Objective 2

Describe and illustrate the financial statements of a merchandising business.


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5-2

Multiple-Step Income Statement

The multiple-step incomestatement contains several sections, subsections, and subtotals.


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5-2

The Salesaccount provides the total amount charged to customers for merchandise sold, including cash sales and sales on account.


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5-2

Sales returns andallowancesare granted by the seller to customers for damaged or defective merchandise.


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5-2

Sales discountsare granted by the seller to customers for early payment of amounts owed.


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5-2

Net salesis determined by subtracting sales returns and allowances and sales discounts from sales.


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5-2

Multiple-Step Income Statement

NetSolutionsIncome Statement For the Year Ended December 31, 2009

Revenue from sales:

Sales $720,185

Less: Sales returns and allowances $ 6,140 Sales discounts 5,790 11,930

Net sales $708,255

Cost of merchandise sold 525,305

Gross profit $182,950

(Continued)

18


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Operating expenses:

Selling expenses:

Sales salaries expense $53,430

Advertising expense 10,860

Depr. Expense–store equipment 3,100

Delivery Expense 2,800

Miscellaneous selling expense 630

Total selling expenses $ 70,820

Administrative expenses:

Office salaries expense $21,020

Rent expense 8,100

Depr. expense–office equipment 2,490

Insurance expense 1,910

Office supplies expense 610

Misc. administrative expense 760

Total admin. expenses 34,890

Total operating expenses 105,710

Income from operations $ 77,240

(Continued)

19


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Other income and expenses:

Rent revenue $ 600

Interest expense (2,440) (1,840)

Net income $75,400

  • 0

5-2

Multiple-Step Income Statement

20

(Concluded)


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5-2

Cost of merchandise soldwas discussed earlier. It is the cost of the merchandise sold to customers.


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5-2

As we discussed in Slide 16, sellers may offer customers sales discounts for early payment of their bills. From the buyer’s perspective, such discounts are referred to as purchase discounts.


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5-2

The buyer may return merchandise to the seller (apurchase return), or the buyer may receive a reduction in the initial price at which the merchandise was purchased (apurchase allowance).


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5-2

Cost of Merchandise Sold

24


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5-2

Single-Step Income Statement

An alternative form of income statement is the single-stepincome statement. As shown in the next slide, the income statement for NetSolutions deducts the total of all expenses in one step from the total of all revenues.


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Example Exercise 5-2

  • 0

5-2

Based upon the following data, determine the cost of merchandise sold for May. Use the format seen in Exhibit 2.

Merchandise Inventory, May 1 $121,200

Merchandise Inventory, May 31 142,000

Purchases 985,000

Purchases Returns and Allowances 23,500

Purchases Discounts 21,000

Transportation In 11,300

26


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Follow My Example 5-2

Merchandise Inventory, May 1 $ 121,200

Purchases $985,000

Less: Purchases returns and allowances $23,500

Purchases discounts 21,000 44,500

Net purchases $940,500

Add transportation in 11,300

Cost of merchandise purchased 951,800

Merchandise available for sale $1,073,000

Less merchandise inventory, May 31 142,000

Cost of merchandise sold $ 931,000

  • 0

5-2

27

For Practice: PE 5-2A, PE 5-2B


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NetSolutionsIncome Statement For the Year Ended December 31, 2009

5-2

Single-Step Income Statement

Revenues:

Net sales $708,255

Rent revenue 600

Total revenues $708,855

Expenses:

Cost of merchandise sold $525,305

Selling expenses 70,820

Administrative expenses 34,890

Interest expense 2,440

Total expenses 633,455

Net income $ 75,400

28


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Retained Earnings Statement for Merchandising Business

5-2

4

NetSolutionsRetained Earnings Statement For the Year Ended December 31, 2009

Retained earnings, 1/1/09 $128,800

Net income for year $75,400

Less dividends 18,000

Increase in retained earnings 57,400

Retained earnings, 12/31/09 $186,200

29


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NetSolutionsBalance SheetDecember 31, 2009

5-2

5

Report Form of Balance Sheet

Assets

Current assets:

Cash $52,950

Accounts receivable 91,080

Merchandise inventory 62,150

Office supplies 480

Prepaid insurance 2,650

Total current assets $209,310

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(Continued)


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5-2

5

Report Form of Balance Sheet

Property, plant, and equip.:

Land $20,000

Store equipment $27,100

Less accumulated

depreciation 5,700 21,400

Office equipment $15,570

Less accumulated

depreciation 4,72010,850 Total property, plant,

and equipment 52,250

Total assets $261,560

31

(Continued)


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5-2

5

Report Form of Balance Sheet

Liabilities

Current liabilities:

Accounts payable $22,420

Note payable (current portion) 5,000

Salaries payable 1,140

Unearned rent 1,800

Total current liabilities $ 30,360

Long-term liabilities:

Note payable (final pmt. due 2017) 20,000

Total liabilities $ 50,360

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(Continued)


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5-2

5

Report Form of Balance Sheet

Stockholders’ Equity

Capital stock 25,000

Retained earnings 186,200

Total stockholders’ equity 211,200

Total liabilities and stockholders’

equity $261,560

(Concluded)

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5-3

Objective 3

Describe and illustrate the accounting for merchandise transactions including: sale of merchandise; purchase of merchandise; transportation costs, sales taxes, trade discounts; dual nature of merchandise transactions.


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5-3

Cash Sales

On January 3, NetSolutions sold $1,800 of merchandise for cash.

35


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5-3

Cash Sales (continued)

Using a perpetual inventory, the $1,200 cost of the inventory must be recorded.

36


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5-3

Credit Card Sales

At the end of the month, $48 was sent to pay the service charge on credit card sales.

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5-3

Sales Discounts

The terms for when payments for merchandise are to be made, agreed on by the buyer and the seller, are called credit terms. If buyer is allowed an amount of time to pay, it is known as the credit period.


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Invoice for $1,500

Terms:

2/10, n/30

  • 0

5-3

Credit Terms

If invoice is paid within 10 days ofinvoice date

$1,470 paid ($1,500 less a 2% discount)

40


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Invoice for $1,500

Terms:

2/10, n/30

  • 0

5-3

If invoice is NOT paid within 10 days ofinvoice date

Full amount ($1,500) is due within 30 days of invoice date

41


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5-3

Sales Discounts

Jan. 22 Cash 1 470 00

Sales Discounts 30 00

Accounts Receivable–Omega Tech. 1 500 00

Collection of Invoice No. 106-8, less 2% discount.

On January 22, NetSolutions receives the amount due, less the 2 percent discount.

42


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5-3

Jan. 13 Sales Returns and Allowances 225 00

Accounts Receivable—Krier Co. 225 00

Credit Memo No. 32

13 Merchandise Inventory 140 00

Cost of Goods Sold 140 00

Cost of merchandise returned. Credit Memo No. 32.

On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions. Selling price, $225; cost to NetSolutions, $140.

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Example Exercise 5-3

  • 0

1-2

5-3

Journalize the following merchandise transactions:

  • Sold merchandise on account, $7,500 with terms of 2/10, n/30. The cost of the merchandise sold was $5,625.

  • Received payment less the discount.

44


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Follow My Example 5-3

  • 0

5-3

  • Accounts Receivable 7,500

    Sales 7,500

Cost of Merchandise Sold 5,625

Merchandise Inventory 5,625

  • Cash 7,350

    Sales Discounts 150

    Accounts Receivable 7,500

45

For Practice: PE 5-3A, PE 5-3B


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5-3

Purchase Transactions (Perpetual Inventory)

JOURNAL

PAGE 24

Post. Ref.

Description

Dr Cr.

Date

2009

Jan. 3 Merchandise Inventory 2 510 00

Cash 2 510 00

Purchased inventory from Bowen Co.

On January 3, NetSolutions purchased merchandise for cash from Alden Company, $2,510.

46


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5-3

Jan. 4 Merchandise Inventory 9 250 00

Accounts Payable—Thomas Corp. 9 250 00

Purchased inventory on account.

On January 4, NetSolutions purchased merchandise on account from Thomas Corporation, $9,250.

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5-3

Purchase Transactions (Perpetual Inventory)

Mar. 12 Merchandise Inventory 3 000 00

Accounts Payable—Alpha Tech. 3 000 00

Purchased inventory on account.

Alpha Technologies issues an invoice for $3,000 to NetSolutions dated March 12, with terms 2/10, n/30.

48


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5-3

Mar. 22 Accounts Payable—Alpha Technol. 3 000 00

Cash 2 940 00

Merchandise Inventory 60 00

Paid Alpha Technologies for March 12 purchase.

If payment is made by March 22, NetSolutions records the discount as a reduction in cost. Notice that Merchandise Inventory is credited because NetSolutions maintains a perpetual inventory.

50


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5-3

Apr. 11 Accounts Payable—Alpha Technol. 3 000 00

Cash 3 000 00

Paid Alpha Technologies for March 12 purchase.

If NetSolutions does not pay the invoice until April 11, it would pay the full amount.

51


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5-3

Purchases Return

A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order.


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5-3

Purchases Allowance

When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment, this is a purchases allowance.


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Example Exercise 5-4

  • 0

5-3

Rofles Company purchased merchandise on account from a supplier for $11,500, terms 2/10, n/30. Rofles Company returned $3,000 of the merchandise and received full credit.

  • If Rofles Company pays the invoice within the discount period, what is the amount of cash required for the payment?

  • Under a perpetual inventory system, what account is credited by Rofles Company to record the return?

59


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Follow My Example 5-4

  • 0

5-3

  • $8,330. Purchase of $11,500 less the return of $3,000 less the discount of $170 [($11,500 – $3,000) x 2%].

  • Merchandise Inventory.

60

For Practice: PE 5-4A, PE 5-4B


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5-3

Transportation Costs

If ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the freight carrier, it is said to be FOB(free on board) shipping point.


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5-3

Transportation Costs

If ownership of the merchandise passes to the buyer when the buyer receives the merchandise, the terms are said to be FOB(free on board) destination.


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5-3

Sales Taxes

Aug. 12 Accounts Receivable—Lemon Co. 106 00

Sales 100 00

Sales Taxes Payable 6 00

Invoice No. 339

On August 12, merchandise is sold on account to Lemon Company, $100. The state has a 6% sales tax.

73

18


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5-3

Sept. 15 Sales Tax Payable 2 900 00

Cash 2 900 00

Payment for sales taxes collected during August.

On September 15, the seller sends in a payment of $2,900 to the taxing unit for the August taxes collected.

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18


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5-3

Trade Discounts

When wholesalers offer special discounts to certain classes of buyers that order large quantities, these discounts are called trade discounts.


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5-4

Inventory Shrinkage

Merchandising businesses may experience some loss of inventory due to shoplifting, employee theft, or errors in recording or counting inventory. If the balance of the Merchandise Inventory account is larger than the total amount of merchandise count, the difference is often called inventory shrinkage or inventory shortage.


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5-4

NetSolutions inventory records indicate that $63,950 of merchandise should be available for sale on December 31, 2009. The physical count reveals that only $62,150 is actually available.


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5-4

Adjusting Entry

Dec. 31 Cost of Merchandise Sold 1 800 00

Merchandise Inventory 1 800 00

Inventory shrinkage (63,950 – $62,150).

Inventory records $63,950

Inventory count 62,150

Inventory shortage $ 1,800

97

18


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5-4

Closing Entries

  • Close the temporary accounts with credit balances to Income Summary.

  • Close the temporary accounts with debit balances to Income Summary.

  • Close Income Summary to Retained Earnings.

  • Close Dividends to Retained Earnings.


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5-4

Step 1: Closing Entries

Close the temporary accounts with credit balances to Income Summary.

Date Item PR Debit Credit

Closing Entries

2009

Dec. 31 Sales 410 720 185 00

Rent Revenue 610 600 00

Income Summary 313 720 785 00

99


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5-4

Step 2: Closing Entries

Close the temporary accounts with debit balances to Income Summary.

100


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31 Income Summary 313 645 385 00

Sales Returns and Allow. 411 6 140 00

Sales Discounts 412 5 790 00

Cost of Merchandise Sold 510 525 305 00

Sales Salaries Expense 520 53 430 00

Advertising Expense 521 10 860 00

Depr. Exp.—Store Equip. 522 3 100 00

Delivery Expense 523 2 800 00

Misc. Selling Expense 529 630 00

Office Salaries Expense 530 21 020 00

Rent Expense 531 8 100 00

Depr. Exp.—Office Equip. 532 2 490 00

Insurance Expense 533 1 910 00

Office Supplies Expense 534 610 00

Misc. Administrative Exp. 539 760 00

Interest Expense 710 2 440 00

101

  • 0

5-4

Step 2: Closing Entries


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31 Income Summary 313 75 400 00

Retained Earnings 311 75 400 00

  • 0

5-4

Step 3: Closing Entries

Close Income Summary(the balance represents a $75,400 profit for NetSolutions in 2009) to Retained Earnings.

102


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31 Retained Earnings 311 18 000 00

Dividends 312 18 000 00

  • 0

5-4

Step 4: Closing Entries

Close Dividends to Retained Earnings.

103


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Example Exercise 5-7

Follow My Example 5-7

  • 0

1-2

5-4

Pulmonary Company’s perpetual inventory records indicate that $382,800 of merchandise should be on hand on March 31, 2008. The physical inventory indicates that $371,250 of merchandise is actually on hand. Journalize the adjusting entry for the inventory shrinkage for Pulmonary Company for the year ended March 31, 2008.

Mar. 31 Cost of Merchandise Sold 11,550

Merchandise Inventory 11,550

Inventory shrinkage ($382,800 – $371,250)

104

For Practice: PE 5-7A, PE 5-7B


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