Chart of Accounts for Periodic Inventory System

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            appendix C
            Periodic Inventory Systems for
            Merchandising Businesses
                                         In this text, we emphasize the perpetual inventory system of accounting for pur-
                                         chases and sales of merchandise. Not all merchandise businesses, however, use per-
                                         petual inventory systems. For example, some managers/owners of small merchandise
                                         businesses, such as locally owned hardware stores, may feel more comfortable us-
                                         ing manually kept records. Because a manual perpetual inventory system is time-
                                         consuming and costly to maintain, the periodic inventory system is often used in
                                         these cases.


                                         Merchandise Transactions in a
                                         Periodic Inventory System
                                         In a periodic inventory system, the revenues from sales are recorded when sales are
                                         made in the same manner as in a perpetual inventory system. However, no attempt
                                         is made on the date of sale to record the cost of the merchandise sold. Instead, the
                                         merchandise inventory on hand at the end of the period is counted. This physical
                                         inventory is then used to determine (1) the cost of merchandise sold during the pe-
                                         riod and (2) the cost of merchandise on hand at the end of the period.
                                            In a periodic inventory system, purchases of inventory are recorded in a pur-
                                         chases account rather than in a merchandise inventory account. No attempt is made
                                         to keep a detailed record of the amount of inventory on hand at any given time.
                                            The purchases account is normally debited for the amount of the invoice before
                                         considering any purchases discounts. Purchases discounts are normally recorded in
                                         a separate purchases discounts account.1 The balance of this account is reported
                                         as a deduction from the amount initially recorded in Purchases for the period. Thus,
                                         the purchases discounts account is viewed as a contra (or offsetting) account to
                                         Purchases.
                                            Purchases returns and allowances are recorded in a similar manner as purchases
                                         discounts. A separate account is used to keep a record of the amount of purchases
                                         returns and allowances during a period. Purchases returns and allowances are re-
                                         ported as a deduction from the amount initially recorded as Purchases. Like Pur-
                                         chases Discounts, the purchases returns and allowances account is a contra (or
                                         offsetting) account to Purchases.
                                            When merchandise is purchased FOB shipping point, the buyer is responsible for
                                         paying the freight charges. In a periodic inventory system, freight charges paid when
                                         purchasing merchandise FOB shipping point are debited to Transportation In, Freight
                                         In, or a similarly titled account.
                                            To illustrate the recording of merchandise transactions in a periodic system, we
                                         will use the following selected transactions for Taylor Co. We will also explain how
                                         the transaction would have been recorded under a perpetual system.

                                         June 5.        Purchased $30,000 of merchandise on account from Owen Clothing,
                                                        terms 2/10, n/30.

                                                        Purchases                                                     30,000
                                                          Accounts Payable—Owen Clothing                                               30,000

                                         Under the perpetual inventory system, such purchases would be recorded in the mer-
                                         chandise inventory account at their cost, $30,000.

                                         1Some businesses prefer to credit the purchases account. If this alternative is used, the balance of the purchases ac-
                                         count will be a net amount—the total purchases less the total purchases discounts for the period.
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         C-2     Appendix C • Periodic Inventory Systems for Merchandising Businesses

                                           June 8.     Returned merchandise purchased on account from Owen Clothing on
                                                       June 5, $500.

                                                       Accounts Payable—Owen Clothing                 500
                                                         Purchases Returns and Allowances                         500

                                           Under the perpetual inventory system, returns would be recorded as a credit to the
                                           merchandise inventory account at their cost of $500.

                                           June 15.    Paid Owen Clothing for purchase of June 5, less return of $500 and
                                                       discount of $590 [($30,000  $500)   2%].

                                                       Accounts Payable—Owen Clothing              29,500
                                                         Cash                                                  28,910
                                                         Purchases Discounts                                      590

                                           Under a perpetual inventory system, a purchases discount account is not used. Instead
                                           the merchandise inventory account is credited for the amount of the discount, $590.

                                           June 18.    Sold merchandise on account to Jones Co., $12,500, 1/10, n/30. The cost of
                                                       the merchandise sold was $9,000.

                                                       Accounts Receivable—Jones Co.               12,500
                                                         Sales                                                 12,500

                                           The entry to record the sale is the same under both systems. Under the perpetual in-
                                           ventory system, the cost of merchandise sold and the reduction in merchandise in-
                                           ventory would also be recorded on the date of sale.

                                           June 21.    Received merchandise returned on account from Jones Co., $4,000.
                                                       The cost of the merchandise returned was $2,800.

                                                       Sales Returns and Allowances                 4,000
                                                         Accounts Receivable—Jones Co.                          4,000

                                           The entry to record the sales return is the same under both systems. In addition, the
                                           cost of the merchandise returned would be debited to the merchandise inventory ac-
                                           count and credited to the cost of merchandise sold account under the perpetual in-
                                           ventory system.

                                           June 22.    Purchased merchandise from Norcross Clothiers, $15,000, terms FOB
                                                       shipping point, 2/15, n/30, with prepaid transportation charges of
                                                       $750 added to the invoice.

                                                       Purchases                                   15,000
                                                       Transportation In                              750
                                                         Accounts Payable—Norcross Clothiers                   15,750

                                           This entry is similar to the June 5 entry for the purchase of merchandise. Since the
                                           transportation terms were FOB shipping point, the prepaid freight charges of $750
                                           must be added to the invoice cost of $15,000. Under the perpetual inventory system,
                                           the purchase is recorded in the merchandise inventory account at the cost of $15,750
                                           (invoice price plus transportation).

                                           June 28.    Received $8,415 as payment on account from Jones Co., less return of
                                                       June 21 and less discount of $85 [($12,500 $4,000)   1%].

                                                       Cash                                         8,415
                                                       Sales Discounts                                 85
                                                         Accounts Receivable—Jones Co.                          8,500
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                                                             Appendix C • Periodic Inventory Systems for Merchandising Businesses                       C-3
                                         This entry is the same under the perpetual inventory system.

                                         June 29.       Received $19,600 from cash sales. The cost of the merchandise sold
                                                        was $13,800.

                                                        Cash                                                         19,600
                                                          Sales                                                                      19,600

                                         The entry to record the sale is the same under both systems. Under the perpetual in-
                                         ventory system, the cost of merchandise sold and the reduction in merchandise in-
                                         ventory would also be recorded on the date of sale.

                                            The multiple-step income statement under the periodic inventory system is il-
                                         lustrated in Exhibit 1. The multiple-step income statement under a perpetual in-
                                         ventory system is similar, except that the cost of merchandise sold is reported as
                                         a single amount.


                                         Chart of Accounts for a Periodic
                                         Inventory System
                                         Exhibit 2 is the chart of accounts for NetSolutions when a periodic inventory sys-
                                         tem is used. The periodic inventory accounts related to merchandising transactions
                                         are shown in color.


                                         End-of-Period Procedures in a
                                         Periodic Inventory System
                                         The end-of-period procedures are generally the same for the periodic and perpet-
                                         ual inventory systems. In the remainder of this appendix, we will discuss the dif-
                                         ferences in procedures for the two systems that affect the work sheet, the adjusting
                                         entries, and the closing entries. As the basis for illustrations, we will use the data
                                         for NetSolutions, presented in Chapter 6.


                                         Work Sheet
                                         The differences in the work sheet for a merchandising business that uses the periodic
                                         inventory system are highlighted in the work sheet for NetSolutions in Exhibit 3. As
                                         we illustrated earlier, accounts for purchases, purchases returns and allowances, pur-
                                         chases discounts, and transportation in are used in a periodic inventory system.
                                            Under the periodic inventory system, the merchandise inventory account, through-
                                         out the accounting period, shows the inventory at the beginning of the period. The
                                         merchandise inventory on January 1, 2007, $59,700, is a part of the merchandise
                                         available for sale. At the end of the period, the beginning inventory amount in the
                                         ledger is replaced with the ending inventory amount. To update the inventory ac-
                                         count, two adjusting entries are used.2 The first adjusting entry transfers the begin-
                                         ning inventory balance to Income Summary. This entry, shown below, has the effect
                                         of increasing the cost of merchandise sold and decreasing net income.

                                         Dec. 31      Income Summary                            59,700
                                                        Merchandise Inventory                                   59,700




                                         2Another  method of updating the merchandise inventory account at the end of the period is called the closing method.
                                         This method adjusts the merchandise inventory through the use of closing entries. This method may not be appropriate
                                         for use in computerized accounting systems. Since the financial statements are the same under both methods and since
                                         computerized accounting systems are used by most businesses, the closing method is not illustrated.
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         C-4     Appendix C • Periodic Inventory Systems for Merchandising Businesses


         •Exhibit 1               Multiple-Step Income Statement—Periodic Inventory System



                                                                                          NetSolutions
                                                                                       Income Statement
                                                                             For the Year Ended December 31, 2007
                                                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:
                                                   Merchandise inventory, January 1, 2007 . . . . .                                   $ 59,700
                                                   Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $521,980
                                                   Less: Purchases returns and allowances . . . . . . $9,100
                                                         Purchases discounts . . . . . . . . . . . . . . . . . 2,525           11,625
                                                   Net purchases . . . . . . . . . . . . . . . . . . . . . . . . . .         $510,355
                                                   Add transportation in . . . . . . . . . . . . . . . . . . . .               17,400
                                                   Cost of merchandise purchased . . . . . . . . . . . .                              $527,755
                                                Merchandise available for sale . . . . . . . . . . . . . . .                          $587,455
                                                Less merchandise inventory,
                                                   December 31, 2007 . . . . . . . . . . . . . . . . . . . . . .                            62,150
                                                       Cost of merchandise sold . . . . . . . . . . . . . . .                                         525,305
                                                Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                           $182,950
                                                Operating expenses:
                                                   Selling expenses:
                                                       Sales salaries expense . . . . . . . . . . . . . . . . .              $ 56,230
                                                       Advertising expense . . . . . . . . . . . . . . . . . .                 10,860
                                                       Depreciation expense—store equipment . . .                               3,100
                                                       Miscellaneous selling expense . . . . . . . . . .                          630
                                                          Total selling expenses . . . . . . . . . . . . . . .                          $ 70,820
                                                   Administrative expenses:
                                                       Office salaries expense . . . . . . . . . . . . . . . .               $ 21,020
                                                       Rent expense . . . . . . . . . . . . . . . . . . . . . . . .             8,100
                                                       Depreciation expense—office equipment . . .                              2,490
                                                       Insurance expense . . . . . . . . . . . . . . . . . . . .                1,910
                                                       Office supplies expense . . . . . . . . . . . . . . . .                    610
                                                       Miscellaneous administrative expense . . . .                               760
                                                          Total administrative expenses . . . . . . . .                                     34,890
                                                   Total operating expenses . . . . . . . . . . . . . . . . .                                         105,710
                                                Income from operations . . . . . . . . . . . . . . . . . . . .                                       $ 77,240
                                                Other income and expense:
                                                   Rent revenue . . . . . . . . . . . . . . . . . . . . . . . . . . .                   $      600
                                                   Interest expense . . . . . . . . . . . . . . . . . . . . . . . . .                        2,440      1,840
                                                Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                             $ 75,400




                                              After the first adjusting entry has been recorded and posted, the balance of the
                                           merchandise inventory account is zero. The second adjusting entry records the cost
                                           of the merchandise on hand at the end of the period by debiting Merchandise In-
                                           ventory. Since the merchandise inventory at December 31, 2007, $62,150, is sub-
                                           tracted from the cost of merchandise available for sale in determining the cost of
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                                                         Appendix C • Periodic Inventory Systems for Merchandising Businesses      C-5

            •Exhibit 2            Chart of Accounts—Periodic Inventory System


                                                   Balance Sheet Accounts                      Income Statement Accounts
                                                    100 Assets                                     400 Revenues
                                             110    Cash                                    410    Sales
                                             111    Notes Receivable                        411    Sales Returns and Allowances
                                             112    Accounts Receivable                     412    Sales Discounts
                                             115    Merchandise Inventory
                                             116    Office Supplies                                500 Costs and Expenses
                                             117    Prepaid Insurance                       510    Purchases
                                             120    Land                                    511    Purchases Returns and
                                             123    Store Equipment                                Allowances
                                             124    Accumulated Depreciation—               512    Purchases Discounts
                                                    Store Equipment                         513    Transportation In
                                             125    Office Equipment                        520    Sales Salaries Expense
                                             126    Accumulated Depreciation—               521    Advertising Expense
                                                    Office Equipment                        522    Depreciation Expense—Store
                                                                                                   Equipment
                                                    200 Liabilities                         523    Transportation Out
                                             210    Accounts Payable                        529    Miscellaneous Selling Expense
                                             211    Salaries Payable                        530    Office Salaries Expense
                                             212    Unearned Rent                           531    Rent Expense
                                             215    Notes Payable                           532    Depreciation Expense—Office
                                                                                                   Equipment
                                                    300 Owner’s Equity                      533    Insurance Expense
                                             310    Chris Clark, Capital                    534    Office Supplies Expense
                                             311    Chris Clark, Drawing                    539    Misc. Administrative Expense
                                             312    Income Summary
                                                                                                   600 Other Income
                                                                                            610    Rent Revenue
                                                                                                   700 Other Expense
                                                                                            710    Interest Expense




                                         merchandise sold, Income Summary is credited. This credit has the effect of de-
                                         creasing the cost of merchandise available for sale during the period, $587,455, by
                                         the cost of the unsold merchandise. The second adjusting entry is shown below.

                                         Dec. 31    Merchandise Inventory         62,150
                                                     Income Summary                            62,150

                                            After the second adjusting entry has been recorded and posted, the balance of
                                         the merchandise inventory account is the amount of the ending inventory. The ac-
                                         counts for Merchandise Inventory and Income Summary after both entries have been
                                         posted would appear in T account form as follows:

                                                                           Merchandise Inventory
                                         2007
                                         Jan. 1 Beginning inventory           59,700    Dec. 31 Beginning inventory             59,700
                                         Dec. 31 Ending inventory             62,150

                                                                             Income Summary
                                         Dec. 31 Beginning inventory          59,700    Dec. 31 Ending inventory                62,150

                                            No separate adjusting entry can be made for merchandise inventory shrinkage
                                         in a periodic inventory system. This is because no perpetual inventory records are
                                         available to show what inventory should be on hand at the end of the period.
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         C-6           Appendix C • Periodic Inventory Systems for Merchandising Businesses


         •Exhibit 3                      Work Sheet—Periodic Inventory System



                                                                            NetSolutions
                                                                            Work Sheet
                                                               For the Year Ended December 31, 2007
                                                                                                              Adjusted               Income              Balance
                                                       Trial Balance                  Adjustments           Trial Balance          Statement              Sheet
                       Account Title                   Dr.            Cr.             Dr.           Cr.     Dr.          Cr.      Dr.        Cr.      Dr.        Cr.
               Cash                                    52,950                                                52,950                                    52,950
               Accounts Receivable                     91,080                                                91,080                                    91,080
               Merchandise Inventory                   59,700                   (b) 62,150 (a)59,700         62,150                                    62,150
               Office Supplies                             1,090                              (c)     610      480                                       480
               Prepaid Insurance                           4,560                              (d) 1,910       2,650                                     2,650
               Land                                    20,000                                                20,000                                    20,000
               Store Equipment                         27,100                                                27,100                                    27,100
               Accum. Depr.—Store Equipment                             2,600                 (e) 3,100                   5,700                                    5,700
               Office Equipment                        15,570                                                15,570                                    15,570
               Accum. Depr.—Office Equipment                            2,230                 (f) 2,490                   4,720                                    4,720
               Accounts Payable                                       22,420                                             22,420                                  22,420
               Salaries Payable                                                               (g) 1,140                   1,140                                    1,140
               Unearned Rent                                            2,400 (h)       600                               1,800                                    1,800
               Notes Payable (final payment, 2017)                    25,000                                             25,000                                  25,000
               Chris Clark, Capital                                  153,800                                            153,800                                 153,800
               Chris Clark, Drawing                    18,000                                                18,000                                    18,000
               Income Summary                                                   (a)59,700     (b)62,150      59,700      62,150    59,700    62,150
               Sales                                                 720,185                                            720,185             720,185
               Sales Returns and Allowances                6,140                                              6,140                 6,140
               Sales Discounts                             5,790                                              5,790                 5,790
               Purchases                              521,980                                               521,980               521,980
               Purchases Returns & Allowances                           9,100                                             9,100               9,100
               Purchases Discounts                                      2,525                                             2,525               2,525
               Transportation In                       17,400                                                17,400                17,400
               Sales Salaries Expense                  55,450                   (g)     780                  60,030                60,030
               Advertising Expense                     10,860                                                10,860                10,860
               Depr. Expense—Store Equipment                                    (e) 3,100                     3,100                 3,100
               Miscellaneous Selling Expense                630                                                630                   630
               Office Salaries Expense                 20,660                   (g)     360                  21,020                21,020
               Rent Expense                                8,100                                              8,100                 8,100
               Depr. Expense—Office Equipment                                   (f) 2,490                     2,490                 2,490
               Insurance Expense                                                (d) 1,910                     1,910                 1,910
               Office Supplies Expense                                          (c)     610                    610                   610
               Misc. Administrative Expense                 760                                                760                   760
               Rent Revenue                                                                   (h)     600                  600                 600
               Interest Expense                            2,440                                              2,440                 2,440
                                                      940,260        940,260      131,700       131,700 1,009,140 1,009,140       719,160   794,560   289,980   214,580
                Net Income                                                                                                         75,400                        75,400
                                                                                                                                  794,560   794,560   289,980   289,980




         (a)   Beginning merchandise inventory, $59,700.           (f) Depreciation of office equipment, $2,490.
         (b)   Ending merchandise inventory, $62,150.              (g) Salaries accrued but not paid (sales salaries,
         (c)   Office supplies used, $610 ($1,090 $480).               $780; office salaries, $360), $1,140.
         (d)   Insurance expired, $1,910.                          (h) Rent earned from amount received in
         (e)   Depreciation of store equipment, $3,100.                advance, $600.
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                                                              Appendix C • Periodic Inventory Systems for Merchandising Businesses                         C-7

                                         One disadvantage of the periodic inventory system is that inventory shrinkage can-
                                         not be measured.3


                                         Completing the Work Sheet
                                         After all of the necessary adjustments have been entered on the work sheet, the
                                         work sheet is completed in the normal manner. An exception to the usual practice
                                         of extending only account balances is Income Summary. Both the debit and credit
                                         amounts for Income Summary are extended to the Adjusted Trial Balance columns.
                                         Extending both amounts aids in the preparation of the income statement because
                                         the debit adjustment (the beginning inventory of $59,700) and the credit adjustment
                                         (the ending inventory of $62,150) are reported as part of the cost of merchandise
                                         sold.
                                            The purchases, purchases discounts, purchases returns and allowances, and trans-
                                         portation in accounts are extended to the Income Statement Columns of the work
                                         sheet, since they are used in computing the cost of merchandise sold. You should
                                         note that the two merchandise inventory amounts in Income Summary are extended
                                         to the Income Statement columns. After all of the items have been extended to the
                                         statement columns, the four columns are totaled and the net income or net loss is
                                         determined.


                                         Financial Statements
                                         The financial statements for NetSolutions are essentially the same under both the
                                         perpetual and periodic inventory systems. The main difference is that the cost of
                                         goods is reported as a single amount under the perpetual system. Exhibit 1 illus-
                                         trates the manner in which cost of merchandise sold is reported in a multiple-step
                                         income statement when the periodic inventory system is used.4


                                         Adjusting and Closing Entries
                                         The adjusting entries are the same under both inventory systems, except for mer-
                                         chandise inventory. As indicated previously, two adjusting entries for beginning and
                                         ending merchandise inventory are necessary in a periodic inventory system.
                                            The closing entries differ in the periodic inventory system in that there is no cost
                                         of merchandise sold account to be closed to Income Summary. Instead, the pur-
                                         chases, purchases discounts, purchases returns and allowances, and transportation
                                         in accounts are closed to Income Summary.5 To illustrate, the adjusting and closing
                                         entries under a periodic inventory system for NetSolutions are shown at the top of
                                         the following pages.




                                         3Any inventory shrinkage that does exist is part of the cost of merchandise sold and is reported on the income state-
                                         ment, since a smaller ending inventory is deducted from other merchandise available for sale.
                                         4The single-step income statement would be the same for both the perpetual and the periodic inventory systems.
                                         5The balance of Income Summary, after the merchandise inventory adjustments and the first two closing entries have

                                         been posted, is the net income or net loss for the period.
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         C-8     Appendix C • Periodic Inventory Systems for Merchandising Businesses




                                                                                         JOURNAL                             Page 16
                                                                                                     Post.
                                                    Date                  Description                Ref.     Debit        Credit
                                              1                         Adjusting Entries                                              1
                                                   2007
                                              2    Dec. 31     Income Summary                        312     59 7 0 0 00               2
                                              3                   Merchandise Inventory              115                   59 7 0 0 00 3
                                              4                                                                                        4
                                              5           31   Merchandise Inventory                 115     62 1 5 0 00               5
                                              6                  Income Summary                      312                   62 1 5 0 00 6
                                              7                                                                                        7
                                              8           31   Office Supplies Expense               534        6 1 0 00               8
                                              9                   Office Supplies                    116                     6 1 0 00 9
                                              10                                                                                       10
                                              11          31   Insurance Expense                     533      1 9 1 0 00               11
                                              12                  Prepaid Insurance                  117                    1 9 1 0 00 12
                                              13                                                                                       13
                                              14          31   Depreciation Expense––Store Equip.    522      3 1 0 0 00               14
                                              15                 Accumulated Depr.––Store Equip.     124                    3 1 0 0 00 15
                                              16                                                                                       16
                                              17          31   Depreciation Expense––Office Equip.   532      2 4 9 0 00               17
                                              18                 Accumulated Depr.––Office Equip.    126                    2 4 9 0 00 18
                                              19                                                                                       19
                                              20          31   Sales Salaries Expense                520        7 8 0 00               20
                                              21               Office Salaries Expense               530        3 6 0 00               21
                                              22                  Salaries Payable                   211                    1 1 4 0 00 22
                                              23                                                                                       23
                                              24          31   Unearned Rent                         212        6 0 0 00               24
                                              25                 Rent Revenue                        610                     6 0 0 00 25
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                                                              Appendix C • Periodic Inventory Systems for Merchandising Businesses         C-9


                                                                                           JOURNAL                             Page 17
                                                                                                     Post.
                                                  Date                   Description                 Ref.      Debit         Credit
                                             1                           Closing Entries                                                   1
                                                  2007
                                             2   Dec. 31      Sales                                   410    720 1 8 5 00                  2
                                             3                Purchases Returns and Allowances        511      9 1 0 0 00                  3
                                             4                Purchases Discounts                     512      2 5 2 5 00                  4
                                             5                Rent Revenue                            610        6 0 0 00                  5
                                             6                   Income Summary                       312                   732 4 1 0 00 6
                                             7                                                                                             7
                                             8           31   Income Summary                          312    659 4 6 0 00                  8
                                             9                   Sales Returns and Allowances         411                     6 1 4 0 00   9
                                            10                   Sales Discounts                      412                     5 7 9 0 00   10
                                            11                   Purchases                            510                   521 9 8 0 00   11
                                            12                   Transportation In                    513                    17 4 0 0 00   12
                                            13                   Sales Salaries Expense               520                    56 2 3 0 00   13
                                            14                   Advertising Expense                  521                    10 8 6 0 00   14
                                            15                   Depreciation Exp.––Store Equip.      522                     3 1 0 0 00   15
                                            16                   Miscellaneous Selling Expense        529                       6 3 0 00   16
                                            17                   Office Salaries Expense              530                    21 0 2 0 00   17
                                            18                   Rent Expense                         531                     8 1 0 0 00   18
                                            19                   Depreciation Exp.––Office Equip.     532                     2 4 9 0 00   19
                                            20                   Insurance Expense                    533                     1 9 1 0 00   20
                                            21                   Office Supplies Expense              534                       6 1 0 00   21
                                            22                   Miscellaneous Administrative Exp.    539                       7 6 0 00   22
                                            23                   Interest Expense                     710                     2 4 4 0 00   23
                                            24                                                                                             24
                                            25           31   Income Summary                          312     75 4 0 0 00                  25
                                            26                   Chris Clark, Capital                 310                    75 4 0 0 00 26
                                            27                                                                                             27
                                            28           31   Chris Clark, Capital                    310     18 0 0 0 00                  28
                                            29                   Chris Clark, Drawing                 311                    18 0 0 0 00 29




            E xercises
            EXERCISE C-1                  Journalize entries for the following related transactions, assuming that Mountain
            Purchases-related             Gallery, Inc. uses the periodic inventory system.
            transactions—periodic
            inventory system              a. Purchased $12,000 of merchandise from Yellowstone Co. on account, terms 2/10,
                                             n/30.
                                          b. Discovered that some of the merchandise was defective and returned items with
                                             an invoice price of $2,500, receiving credit.
                                          c. Paid the amount owed on the invoice within the discount period.
                                          d. Purchased $9,000 of merchandise from Glacier, Inc. on account, terms 1/10, n/30.
                                          e. Paid the amount owed on the invoice within the discount period.

            EXERCISE C-2                  Journalize entries for the following related transactions, assuming that Aveda Com-
            Sales-related transactions—   pany uses the periodic inventory system.
            periodic inventory system
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         C-10    Appendix C • Periodic Inventory Systems for Merchandising Businesses

                                           July 6 Sold merchandise to a customer for $18,500, terms FOB shipping point,
                                                  2/10, n/30.
                                                6 Paid the transportation charges of $420, debiting the amount to Accounts
                                                  Receivable.
                                                9 Issued a credit memorandum for $4,700 to the customer for merchandise
                                                  returned.
                                               16 Received a check for the amount due from the sale.

         EXERCISE C-3                      Data assembled for preparing the work sheet for Meridian Co. for the fiscal year
         Adjusting entries for             ended December 31, 2006, included the following:
         merchandise inventory—
         periodic inventory system                         Merchandise inventory as of January 1, 2006            $475,000
                                                           Merchandise inventory as of December 31, 2006          $528,300

                                             Journalize the two adjusting entries for merchandise inventory that would appear
                                           on the work sheet, assuming that the periodic inventory system is used.

         EXERCISE C-4                      For (a) through (i), identify the items designated by “X” and “Y.”
         Identification of missing
         items from income                 a.   Sales    (X    Y)    Net sales
         statement—periodic                b.   Purchases     (X    Y)    Net purchases
         inventory system                  c.   Net purchases     X    Cost of merchandise purchased
                                           d.   Merchandise inventory (beginning)     Cost of merchandise purchased                X
                                           e.   Merchandise available for sale    X    Cost of merchandise sold
                                           f.   Net sales    Cost of merchandise sold    X
                                           g.   Gross profit    Operating expenses    X
                                           h.   X     Y    Operating expenses
                                           i.   Income from operations      X    Y    Net income

         EXERCISE C-5                      Selected data for Canyon Ferry Stores Company for the year ended December 31,
         Multiple-step income              2006, are as follows:
         statement—periodic
         inventory system                  Merchandise inventory, January 1       $      85,760   Sales                          $1,288,000
         Gross profit: $230,560           Merchandise inventory, December 31           102,240   Sales discounts                    10,400
                                           Purchases                                  1,051,200   Sales returns and allowances       13,920
                                           Purchases discounts                           12,800   Transportation in                  36,000
                                           Purchases returns and allowances              24,800

                                              Prepare a multiple-step income statement through gross profit for Canyon Ferry
                                           Stores Company for the current year ended December 31.

         EXERCISE C-6                      Selected account titles and related amounts appearing in the Income Statement and
         Adjusting and closing             Balance Sheet columns of the work sheet of Southern Bell Company for the year
         entries—periodic inventory        ended December 31 are listed in alphabetical order as follows:
         system
                                           Administrative Expenses          $ 72,000       Purchases                             $ 820,000
                                           Building                          312,500       Purchases Discounts                       14,000
                                           Cash                               58,500       Purchases Returns and Allowances           9,000
                                           Connie Sorum, Capital             433,080       Salaries Payable                           4,220
                                           Connie Sorum, Drawing              40,000       Sales                                  1,450,000
                                           Interest Expense                    2,500       Sales Discounts                           18,000
                                           Merchandise Inventory (1/1)       300,000       Sales Returns and Allowances              32,000
                                           Merchandise Inventory (12/31)     275,000       Selling Expenses                         240,200
                                           Notes Payable                      25,000       Store Supplies                             7,700
                                           Office Supplies                    10,600       Transportation In                         21,300

                                               All selling expenses have been recorded in the account entitled Selling Expenses,
                                           and all administrative expenses have been recorded in the account entitled Admin-
                                           istrative Expenses. Assuming that Southern Bell Company uses the periodic inven-
                                           tory system, journalize (a) the adjusting entries for merchandise inventory and (b)
                                           the closing entries.
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                                                         Appendix C • Periodic Inventory Systems for Merchandising Businesses   C-11



            Problems
            PROBLEM C-1                   The following were selected from among the transactions completed by Infinet Shops,
            Sales-related and purchase-   Inc., during November of the current year:
            related transactions—
            periodic inventory system     Nov. 2. Purchased merchandise on account from Loftin Co., list price $24,000,
                                                  trade discount 25%, terms FOB destination, 2/10, n/30.
                                               8. Sold merchandise for cash, $8,100.
                                               9. Purchased merchandise on account from Chestnut Co., $12,000, terms
                                                  FOB shipping point, 2/10, n/30, with prepaid transportation costs of $180
                                                  added to the invoice.
                                              10. Returned $3,000 of merchandise purchased on November 2 from Loftin Co.
                                              11. Sold merchandise on account to Fawcett Co., list price $2,500, trade dis-
                                                  count 20%, terms 1/10, n/30.
                                              12. Paid Loftin Co. on account for purchase of November 2, less return of
                                                  November 10 and discount.
                                              15. Sold merchandise on nonbank credit cards and reported accounts to the
                                                  card company, American Express, $9,850.
                                              19. Paid Chestnut Co. on account for purchase of November 9, less discount.
                                              21. Received cash on account from sale of November 11 to Fawcett Co., less
                                                  discount.
                                              25. Sold merchandise on account to Clemons Co., $3,000, terms 1/10, n/30.
                                              28. Received cash from American Express for nonbank credit card sales of
                                                  November 15, less $380 service fee.
                                              30. Received merchandise returned by Clemons Co. from sale on November 25,
                                                  $1,700.

                                          Instructions
                                          Journalize the transactions for Infinet Shops, Inc., in a two-column general journal.


            PROBLEM C-2                   The following were selected from among the transactions completed by Copra Sen-
            Sales-related and purchase-   try Company during July of the current year:
            related transactions—
            periodic inventory system     July 3. Purchased merchandise on account from Swanson Co., list price $60,000,
                                                  trade discount 30%, terms FOB shipping point, 2/10, n/30, with prepaid
                                                  transportation costs of $1,200 added to the invoice.
                                               4. Purchased merchandise on account from Lambert Co., $8,000, terms FOB
                                                  destination, 1/10, n/30.
                                               7. Sold merchandise on account to Walsh Co., list price $12,000, trade dis-
                                                  count 20%, terms 2/10, n/30.
                                               9. Returned merchandise purchased on July 4 from Lambert Co., $1,300.
                                              13. Paid Swanson Co. on account for purchase of July 3, less discount.
                                              14. Paid Lambert Co. on account for purchase of July 4, less return of July 9
                                                  and discount.
                                              17. Received cash on account from sale of July 7 to Walsh Co., less discount.
                                              19. Sold merchandise on nonbank credit cards and reported accounts to the
                                                  card company, American Express, $7,450.
                                              22. Sold merchandise on account to Wu Co., $4,420, terms 2/10, n/30.
                                              24. Sold merchandise for cash, $4,350.
                                              25. Received merchandise returned by Wu Co. from sale on July 22, $1,610.
                                              31. Received cash from American Express for nonbank credit card sales of
                                                  July 19, less $290 service fee.

                                          Instructions
                                          Journalize the transactions for Copra Sentry Co. in a two-column general journal.
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         C-12    Appendix C • Periodic Inventory Systems for Merchandising Businesses

         PROBLEM C-3                       The following selected transactions were completed during May between Simkins
         Sales-related and purchase-       Company and Burk Co.:
         related transactions for
         seller and buyer—periodic         May 6. Simkins Company sold merchandise on account to Burk Co., $18,500,
         inventory system                         terms FOB destination, 2/15, n/eom.
                                               6. Simkins Company paid transportation costs of $600 for delivery of mer-
                                                  chandise sold to Burk Co. on May 6.
                                              10. Simkins Company sold merchandise on account to Burk Co., $15,750,
                                                  terms FOB shipping point, n/eom.
                                              11. Burk Co. returned merchandise purchased on account on May 6 from
                                                  Simkins Company, $5,500.
                                              14. Burk Co. paid transportation charges of $300 on May 10 purchase from
                                                  Simkins Company.
                                              17. Simkins Company sold merchandise on account to Burk Co., $30,000,
                                                  terms FOB shipping point, 1/10, n/30. Simkins prepaid transportation costs
                                                  of $1,750, which were added to the invoice.
                                              21. Burk Co. paid Simkins Company for purchase of May 6, less discount and
                                                  less return of May 11.
                                              27. Burk Co. paid Simkins Company on account for purchase of May 17, less
                                                  discount.
                                              31. Burk Co. paid Simkins Company on account for purchase of May 10.
                                           Instructions
                                           Journalize the May transactions for (1) Simkins Company and for (2) Burk Co.

         PROBLEM C-4                       The accounts and their balances in the ledger of Sunshine Sports Co. on December
         Preparation of work sheet,        31, 2006, are as follows:
         financial statements, and
         adjusting and closing             Cash                                              $ 28,000     Sales Discounts                    $ 7,100
         entries—periodic inventory        Accounts Receivable                                142,500     Purchases                           500,000
         system                            Merchandise Inventory                              200,000     Purchases Returns and Allowances     10,100
                                           Prepaid Insurance                                    9,700     Purchases Discounts                   4,900
                                           Store Supplies                                       4,250     Transportation In                    11,200
                                           Office Supplies                                      2,100     Sales Salaries Expense               81,400
                                           Store Equipment                                    132,000     Advertising Expense                  45,000
                                           Accumulated Depreciation—                                      Depreciation Expense—
         1. Net income: $222,950            Store Equipment                                    40,300      Store Equipment                        —
                                           Office Equipment                                     50,000    Store Supplies Expense                   —
                                           Accumulated Depreciation—                                      Miscellaneous Selling Expense         1,600
                                             Office Equipment                                   17,200    Office Salaries Expense              44,000
                                           Accounts Payable                                     56,700    Rent Expense                         26,000
                                           Salaries Payable                                         —     Insurance Expense                        —
                                           Unearned Rent                                         1,200    Depreciation Expense—
                                           Note Payable (final payment, 2013)                  100,000      Office Equipment                       —
                                           Sherri Vogel, Capital                               159,600    Office Supplies Expense                  —
                                           Sherri Vogel, Drawing                                40,000    Miscellaneous Administrative
                                           Income Summary                                           —       Expense                             1,650
                                           Sales                                               960,000    Rent Revenue                             —
                                           Sales Returns and Allowances                         11,900    Interest Expense                     11,600

                                           The data needed for year-end adjustments on December 31 are as follows:

                                           Merchandise inventory on December 31                     .......................                  $215,000
                                           Insurance expired during the year . . . . .              .......................                     4,800
                                           Supplies on hand on December 31:
                                             Store supplies . . . . . . . . . . . . . . . . . .     .......................                     1,300
                                             Office supplies . . . . . . . . . . . . . . . . . .    .......................                       750
                                           Depreciation for the year:
                                             Store equipment . . . . . . . . . . . . . . . .        .......................                     7,500
                                             Office equipment . . . . . . . . . . . . . . . .       .......................                     3,800
                                           Salaries payable on December 31:
                                             Sales salaries . . . . . . . . . . . . . . . . . . .   .......................      $4,000
                                             Office salaries . . . . . . . . . . . . . . . . . .    .......................       2,000         6,000
                                           Unearned rent on December 31 . . . . . .                 .......................                       400
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                                                       Appendix C • Periodic Inventory Systems for Merchandising Businesses   C-13

                                         Instructions
                                         1. Prepare a work sheet for the fiscal year ended December 31, listing all accounts
                                            in the order given.
                                         2. Prepare a multiple-step income statement.
                                         3. Prepare a statement of owner’s equity.
                                         4. Prepare a report form of balance sheet, assuming that the current portion of the
                                            note payable is $10,000.
                                         5. Journalize the adjusting entries.
                                         6. Journalize the closing entries.
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