1 EXERCISES Ex. 5–2 $15,710 million ($20,946 million – $5,236 million) Ex. 5–3 a. Purchases discounts, purchases returns and allowances b. Transportation in c. Merchandise available for sale d. Merchandise inventory (ending) Ex. 5–5 1. The schedule should begin with the January 1, not the December 31, mer-chandise inventory. 2. Purchases returns and allowances and purchases discounts should be de-ducted from (not added to) purchases. 3. The result of subtracting purchases returns and allowances and purchases discounts from purchases should be labeled “net purchases.” 4. Transportation in should be added to net purchases to yield cost of merchan-dise purchased. 5. The merchandise inventory at December 31 should be deducted from mer-chandise available for sale to yield cost of merchandise sold. A correct cost of merchandise sold section is as follows: Cost of merchandise sold: Merchandise inventory, January 1, 2006 . $132,000 Purchases................................................... $600,000 Less: Purchases returns and allowances $14,000 Purchases discounts...................... 6,000 20,000 Net purchases ............................................ $580,000 Add transportation in................................. 7,500 Cost of merchandise purchased......... 587,500 Merchandise available for sale................. $719,500 Less merchandise inventory, December 31, 2006 ............................... 120,0002 Cost of merchandise sold......................... $599,500 Ex. 5–6 Net sales: $3,010,000 ($3,570,000 – $320,000 – $240,000) Gross profit: $868,000 ($3,010,000 – $2,142,000) Ex. 5–8 THE MERIDEN COMPANY Income Statement For the Year Ended June 30, 2006 Revenues: Net sales ...................................................................... $5,400,000 Rent revenue ............................................................... 30,000 Total revenues ......................................................... $5,430,000 Expenses: Cost of merchandise sold .......................................... $3,240,000 Selling expenses......................................................... 480,000 Administrative expenses............................................ 300,000 Interest expense.......................................................... 47,500 Total expenses ........................................................ 4,067,500 Net income.......................................................................... $1,362,500 Ex. 5–9 1. Sales returns and allowances and sales discounts should be deducted from (not added to) sales. 2. Sales returns and allowances and sales discounts should be deducted from sales to yield "net sales" (not gross sales). 3. Deducting the cost of merchandise sold from net sales yields gross profit. 4. Deducting the total operating expenses from gross profit would yield income from operations (or operating income). 5. Interest revenue should be reported under the caption “other income” and should be added to income from operations to arrive at net income. 6. The final amount on the income statement should be labeled net income, not gross profit. A correct income statement would be as follows:3 Ex. 5–9 Concluded THE PLAUTUS COMPANY Income Statement For the Year Ended October 31, 2006 Revenue from sales: Sales ........................................................... $4,200,000 Less: Sales returns and allowances........ $81,200 Sales discounts............................... 20,300 101,500 Net sales................................................ $4,098,500 Cost of merchandise sold .............................. 2,093,000 Gross profit...................................................... $2,005,500 Operating expenses: Selling expenses........................................ $ 203,000 Transportation out..................................... 7,500 Administrative expenses........................... 122,000 Total operating expenses .................... 332,500 Income from operations ................................. $1,673,000 Other income: Interest revenue ......................................... 66,500 Net income....................................................... $1,739,500 Ex. 5–11 a. CALLOWAY COMPANY Income Statement For the Year Ended January 31, 2006 Revenue from sales: Sales ........................................................... $925,000 Less: Sales returns and allowances........ $60,000 Sales discounts............................... 20,000 80,000 Net sales................................................ $845,000 Cost of merchandise sold .............................. 560,000 Gross profit...................................................... $285,000 Operating expenses: Selling expenses........................................ $120,000 Administrative expenses........................... 80,000 Total operating expenses .................... 200,000 Income from operations ................................. $ 85,000 Other expense: Interest expense ........................................ 7,5004 Net income....................................................... $ 77,500 b. The major advantage of the multiple-step form of income statement is that re-lationships such as gross profit to sales are indicated. The major disadvan-tages are that it is more complex and the total revenues and expenses are not indicated, as is the case in the single-step income statement. Ex. 5–13 It was acceptable to debit Sales for the $235,750. However, using Sales Returns and Allowances assists management in monitoring the amount of returns so that quick action can be taken if returns become excessive. Accounts Receivable should also have been credited for $235,750. In addition, Cost of Merchandise Sold should only have been credited for the cost of the mer-chandise sold, not the selling price. Merchandise Inventory should also have been debited for the cost of the merchandise returned. The entries to correctly record the returns would have been as follows: Sales (or Sales Returns and Allowances).................. 235,750 Accounts