ACCT 1A&B: Fundamentals of Accounting

BCSV
Fundamentals of Accounting Part I
Accounting for Merchandising Business
I.
CONCEPTUAL SKILLS
A. True or False.
Write A if the statement is true otherwise, write B.
1. When merchandise inventory is purchased with credit terms of 2/10, n/60, the credit
period is 60 days from date of the invoice.
2. An inventory system in which the business has up-to-date data as to the quantity of
goods on hand is called a periodic inventory system.
3. A deduction allowed from the invoice price of goods if payment is made within a
specified period of time is called a trade discount.
4. When goods are shipped under freight terms of FOB shipping point, the buyer of the
goods pays the freight charges.
5. When a return of merchandise requires the buyer to notify the seller of the reduction
in the invoice due to the return, the memorandum sent by the buyer is called a debit
memorandum.
6. The cost of goods sold is determined by adding the cost of purchases to the
beginning merchandise inventory and subtracting the ending merchandise inventory.
7. In a periodic inventory system, transportation charges for merchandise are added to
net purchases to determine the cost of goods purchased.
8. In a perpetual inventory system, transportation charges are recorded with a debit to
the merchandise inventory account.
9. Transportation-In, Freight-In, and Delivery Expense are all the same account.
10. Under a periodic system with inventory included in the closing entry procedure, the
Credit column of the Income Statement columns of the work sheet will likely contain
more than revenue account balances.
11. The purpose of including the Merchandise Inventory account in the closing procedure
is to close the beginning balance to the Income Summary account and enter the
unsold balance in the Merchandise Inventory account (periodic system).
12. The steps in the accounting cycle are different for a merchandising business than
they are for a service business.
13. Operating expenses include general expenses, administrative expenses, and cost of
goods sold.
14. Merchandise is purchased FOB shipping point. The seller will pay the freight charges.
15. Merchandise purchased on June 8 with credit terms of 2/10, n/30, must be paid
sooner than with credit terms of n/10 EOM.
B. Multiple Choices. Select the letter of the best answer.
1. Gross profit from sales is the difference between
A.
B.
C.
D.

Net sales and operating expenses

Net sales and cost of goods sold
Net sales and the cost of goods sold plus all the expenses
Gross sales less the sales discounts and sales returns and allowances

2. Under the periodic inventory system, the Purchases account is used to record
A.
B.
C.
D.

Only cash purchases of merchandise inventory

Purchases of any asset on account or note payable
Only purchases of merchandise inventory on account
Purchases of merchandise inventory for cash or on account

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3. Which of the following is used to determine the cost of goods available for sale under
periodic inventory?
A.
B.
C.
D.

Beginning merchandise inventory + purchases + ending merchandise inventory

Ending merchandise inventory + purchases freight charges
Beginning merchandise inventory + purchases freight charges
Beginning merchandise inventory + purchases purchases discount + freight
charges

4. Under a perpetual inventory system, merchandise is purchased on account. The

correct journal entry for this purchase will be a:
A.
B.
C.
D.

Debit
Debit
Debit
Debit

to
to
to
to

purchases and input tax ; a credit to cash

M. Inventory and input tax ; a credit to accounts payable
M. Inventory and input tax ; a credit to Cash
Purchase returns and input tax ; a credit to cost of goods sold

5. Under a perpetual inventory system part of the merchandise purchased on account

at an earlier time is now being returned. None of the goods have been paid for. The
correct journal entry for this return will be a
A. debit
B. debit
C. debit
D. debit

to
to
to
to

Cash and a credit to Purchases and input tax

Merchandise Inventory and input tax ; and a credit to Accounts Payable
Accounts Payable and a credit to Merchandise Inventory and input tax
Purchases Returns and input tax ; and a credit to Cost of Goods Sold

6. Under a perpetual inventory system supplies are purchased for cash. The correct
journal entry for this purchase will be a
A. debit
B. debit
C. debit
D. debit

to
to
to
to

Purchases and input tax ; and a credit to Cash

Merchandise Inventory and input tax ; and a credit to Cash
Supplies and credit Cost of Goods Sold
Supplies and a credit to Cash

7. Under the periodic inventory system, which of the following is a correct closing entry?
A. Income Summary, debit; Sales, credit
B. Income Summary, credit; Sales Returns and Allowances, debit
C. Income Summary, debit; Merchandise Inventory (beginning), credit
D. Purchases, debit; Income Summary, credit
8. When ________, the cost of goods sold will be the same as the cost of purchases.
A. there is no beginning merchandise inventory (first year of business)
B. there is no ending merchandise inventory
C. purchases are equal to net sales
D. the beginning and ending merchandise inventory values are the same
9. In preparing a 10-column worksheet
A. The beginning inventory is extended as a credit in the income statement
columns.

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B. The beginning inventory is extended as a credit in the statement of financial
position columns.
C. The ending inventory is extended as a debit in the income statement columns
and as a credit in the statement of financial position columns.
D. The ending inventory is extended as a credit in the income statement columns
and as a debit in the statement of financial position columns.
10. The use of purchase discount account implies that the recorded cost of a purchased
inventory is
A. Invoice price
B. Invoice price plus any purchase discount lost
C. Invoice price less the purchase discount taken
D. Invoice price less the purchase discount allowable whether taken or not
11. The use of discount lost account implies that cost of a purchased inventory is
A. Invoice price
B. List price
C. Invoice price less the purchase discount taken
D. Invoice price less the purchase discount allowable whether or not taken
12. Which of the following should be included in inventory at the end of reporting period?
A. Goods in transit which were purchased FOB shipping point
B. Goods in transit which were purchased FOB destination
C. Goods received from another entity on consignment
D. Goods in transit to a customer which were sold to the customer FOB shipping
point
13. Goods shipped FOB shipping point at year-end should ordinarily be included in
A. The inventory of the buyer
B. The inventory of the seller
C. Neither the inventory of the buyer nor the inventory of seller
D. Both the inventory of buyer and of seller
14. Goods shipped FOB destination in transit at the end of the year should be included in
the inventory of
A. Seller
B. Common carrier
C. Buyer
D. Bank
15. What is the method of accounting for inventory in which the cost of goods sold is
recorded each time a sale is made?
A. Point of sale inventory system
B. Periodic inventory system
C. Perpetual inventory system
D. Just in time inventory system
16. Which of the following is incorrect about the perpetual inventory method?
A. Purchases are recorded as debit to the inventory account.
B. The entry to record a sale includes a debit to cost of goods sold and a credit to
inventory.
C. After a physical inventory count, inventory is credited for any missing inventory.
D. Purchase returns are recorded by debiting accounts payable and crediting
purchase returns and allowances.

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17. An
A.
B.
C.
D.

entry debiting inventory and crediting cost of goods sold would be made when
Merchandise is sold and the periodic inventory method is used.
Merchandise is sold and the perpetual inventory method is used.
Merchandise is returned and the perpetual inventory method is used.
Merchandise is returned and the periodic inventory method is used.

18. A discount given to a customer for purchasing a large volume of merchandise is

typically referred to as
A. Trade discount
B. Quantity discount
C. Size discount
D. Cash discount
19. Which of the following terms represents the deduction from the invoice price of
purchased goods granted by the supplier for early payment?
A. Sales discount
B. Purchase discount
C. Trade discount
D. Purchase return and allowance
20. In a periodic system, the beginning inventory is
A. Net purchases minus cost of goods sold
B. Net purchases minus ending inventory
C. Total goods available for sale minus net purchases
D. Total goods available for sale minus cost of goods sold
21. Why is inventory included in the computation of net income?
A. To determine cost of goods sold
B. To determine sales revenue
C. To determine merchandise returns
D. Inventory is not included in the computation of net income
22. Entities must allocate the cost of all goods available for sale between
A. The cost of goods on hand at the beginning and the cost of goods purchased
during the period.
B. The cost of goods on hand at the end and the cost of goods purchased during the
period.
C. The income statement and the statement of financial position.
D. All of the choices are correct.
23. When inventory is misstated, the presentation lacks
A. Relevance
B. Faithful representation
C. Comparability
D. Understandability
24. When the current years ending inventory is overstated
A. The cost of goods sold of current year is overstated.
B. The total assets of current year is understated.
C. The net income of current year is overstated.
D. The net income next year is overstated.
25. If an entity ended a period with a larger inventory that it had at the beginning of the
period, which of the following statement is true?
A. The cost of goods sold was greater than net purchases.

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B. Net income was greater than gross profit.
C. The cost of goods available for sale was smaller than cost of goods sold.
D. The cost of goods sold as smaller than net purchases.
II.
COMPUTATIONAL AND ANALYTICAL SKILLS
Supply the answer.
Problem 1: Vision Company occurred the following transactions during the month of May of
the current year:
May 6

Sold merchandise on account, list price P 500,000. Terms: 10; 5/15, n/30, FOB
Destination, freight collect, P 25,000.

May 8

Sold goods for cash, P 300,000. Transportation cost is P 3,000, FOB Shipping
point, freight collect.

May
10
May
12
May
21

Sold P 600,000. Terms: 20, 10; 5/10, n/30. FOB Destination, freight prepaid, P
60,000.
Sold P 400,000. Terms: 3/10, n/30; FOB Shipping point, freight prepaid, P 4,000.
Collected sales for May 6.

Disregard VAT.
Give the correct amount of the following items:
1. Total net sales.
2. Total accounts receivable.
3. Total freight out.
4. Total sales discount.
5. Cash collected from May 6 sale.
Problem 2: STM Co., a VAT registered company, engaged in the following transactions
during September 2013: (The Co. is using the perpetual inventory system)
9 /3

Purchased merchandise on account, terms: FOB Shipping point, 5 / 10; 4 /15; 3/20
n/60. The related invoice is priced at P31,320 (including a freight charge of P5,000).

9/11

Sold merchandise on account, terms: FOB Destination, 3 / 10 n/25. Goods costing

P20,300 were sold at P28,000. Freight paid amounted to P900.

9/15

Received the payment for goods sold on 9/11.

9/17

Paid the goods purchased on 9/3.

Assuming no other transactions relevant to inventories

Required: Compute for the
6. Peso amount of inventory on hand as of Sept. 30.
7. Amount of VAT payable.
8. Purchase discount availed.
9. Amount of cash paid on September 17.
10.Gross profit.
11.Net income.

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Problem 3: Bri Co. sold merchandise to An Co. on account, P95,760, terms 2/15, n/30 FOB
Destination. Bri prepaid the freight in the amount of P3,000. The cost of the merchandise
sold is P57,900. Bri Co. issued a credit memorandum for P25,984 for merchandise returned
and later received the amount due within the discount period. The cost of the defective
merchandise is P21,220.
Required: Compute for the
12.Amount received from the customer.
13.Net sales.
14.Gross profit.
15.Net profit.
Problem 4: X-Con Company regularly buys merchandise from Y-Con Company and is
allowed trade discounts of 15% and 10% from the list price. Ex-Con made a purchase on May
20, 2013 and received an invoice with a list price of 150,000, a freight charge of P2,500, and
payment terms of net 45 days.
Ignore VAT.
Required: Compute for the
16.Total trade discounts to be recorded in the books of Y-Con.
17.Purchases.
Problem 5: Xem Co. purchased an item of merchandise quoted and listed at P210,000
under the following terms: trade discounts of 15%, 10%, 5%, 3/12 n/30.
Required: Compute for the
18.Purchases under net method.
19.Cash payment, if settlement is made within the discount period.
20.Purchase discounts lost under net method, if settlement is made outside
the discount period.
Problem 6: Psych Distributors, a computer store, specializes in the sale of IBM compatibles
and software packages and had the following transactions with one of its suppliers:
Purchases of IBM compatibles
Purchases of commercial software package
Returns and allowances
Purchase discounts taken

P3,280,000
900,000
80,000
27,000

Purchases (VAT-exclusive) were made throughout the year on terms 3/11 n/30. All returns
and allowances took place within 5 days of purchase and prior to any payment of account.
Required: Compute for the
21.Input tax.
22.Purchase Discounts not taken.
Problem 7: Mort Inc. asks you to review its December 31, 2013, inventory values. The
following information is given to you:
Account balances prior to adjustments below:
Merchandise Inventory
P704,670
Accounts Receivable
P606,512
Accounts Payable
P1,163,705.60
Input Tax
P521,825.60
Sales
P2,195,100

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Output Tax

P713,412

A. Mort uses the periodic inventory system. A physical count reveals P704,670 of
inventory on hand at December 31, 2013.
B. Not included in the physical count of inventory is P31,260 cost of merchandise
purchased on December 15 from Shendelzare suppliers. This merchandise was
shipped FOB Shipping point on December 29 and arrived in January. The invoice
arrived and was recorded on December 31.
C. Included in inventory is merchandise sold to Arach on December 30, FOB Destination.
The merchandise was shipped after it was counted. The invoice was prepared and
recorded as a sale on account for P38,400 (VAT exclusive) on December 31. The
merchandise cost P22,050, and Arach received it on January 3.
D. Included in inventory was merchandise received from Brood on December 31 with an
invoice price of P52,516.80. the merchandise was shipped FOB Destination. The
invoice, which has not yet arrived, has not been recorded.
E. Not included in inventory is P25,620 cost of merchandise purchased from Lich Co.
this merchandise was received on December 31 after the inventory had been
counted. The invoice was received and recorded on December 30.
F.

Included in inventory was P31,314 worth of inventory held by Mort on consignment

from Jakiro Corp.

G. Included in inventory is merchandise sold to Rylai FOB Shipping point. This

merchandise was shipped after it was counted. The invoice was prepared and
recorded as a sale for P63,504 on December 31. The cost of this merchandise was
P34,560, and Rylai received the merchandise on January 5.
H. Excluded from inventory was a carton labeled Please accept for credit. This carton
contains merchandise costing P4,500 which had been sold to a customer for P8,736.
No entry had been made to the books to reflect the return, but none of the returned
merchandise seemed damaged.
Required: Compute for the correct balance of
23.Merchandise inventory, December 31.
24.Accounts receivable, December 31
25.Accounts payable, December 31
26.Sales
27.VAT payable
Problem 8: In testing the sales cut-off for the Insulto Corporation in connection with an
audit for the year ended October 31, 2013, you find the following information:
A physical inventory was taken as of the close of business on October 31, 2013. All
customers are within a 3 day delivery area of the companys plant. The unadjusted
balances of Sales, Output tax, and Inventories are P7,500,000, P900,000 and P330,000
respectively. Sales and costs are VAT exclusive.
Invoice #

FOB terms:

24601

Destination

Date
Shipped:
Oct. 20

Date
recorded:
Oct. 31

Sales:

Cost:

P 3,000

P 2,700

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33702
33706
41706
42666
45112
45988
57609
73422
92433

Shipping pt.
Shipping pt.
Destination
Destination
Shipping pt.
Shipping pt.
Destination
Shipping pt.
Destination

Oct. 31
Oct. 25
Oct. 31
Oct. 31
Nov. 2
Nov. 5
Oct. 25
Nov. 4
Nov. 5

Nov. 2
Oct. 31
Oct. 29
Nov. 2
Oct. 23
Nov. 6
Nov. 3
Oct. 31
Nov. 2

7,500
5,400
12,600
27,600
19,500
22,500
11,700
25,800
15,000

6,000
3,600
9,300
24,000
15,300
17,400
6,000
24,600
12,000

Required: based on the following information, compute the October 31, 2013,
adjusted balances of the following accounts:
28.Sales
29.Output Tax
30.Inventories
Problem 9: KP Company prepares monthly income statements. A physical inventory is
taken only at year-end. All sales are made on account. The rate of markup on cost is 50%.
The following information relates to the month of June:
Accounts Receivable, June 1
Accounts receivable, June 30
Collection of accounts receivable during June
Inventory, June 1
Purchases of inventory during June

P102,000
153,000
255,000
183,600
163,200

Disregard the effect of VAT.

Required: compute for
31.Cost of sales
32.Gross margin
33.Inventory, June 30
Problem 10: On the eve of June 15, 2013, a fire destroyed the entire merchandise inventory
of Epic Merchandising. The merchandise was not insured with any insurance company. The
following information was gathered:
Inventory, January 1
Purchases, January 1 June 15
Sales, January 1 June 15
Markup % on cost

P250,000
1,500,000
2,000,000
25%

Disregard the effect of VAT.

Required: compute for
34.Cost of sales
35.Gross profit
36.Inventory loss
Problem 11: The balances of selected accounts taken from the December 31, 2012
statement of financial position of Javert, Inc. are as follows:
Accounts Receivable
Allowance for doubtful accounts

P 337,000
12,000

The following transactions affecting accounts receivable occurred during the year ended
December 31, 2013: (Disregard the effect of VAT)

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Sales (all on account, terms 2/10, 1/15, n/45)
Cash received from customers
From customers paying within the 10-day discount period
From customers paying within the 15-day discount period
From recovery of accounts written off
From customers paying beyond the discount period
Accounts receivable written off as worthless
Credit memoranda for sales returns

P 1,500,000
1,600,000
882,000
495,000
3,000
?
11,000
6,000

Based on assessment of collectability of the accounts, impairment loss recognized on

accounts receivable is P15,000.
Required: Compute for the
37.Total net sales.
38.Amortized cost of Accounts receivable.
Problem 12: Vojee Co. purchased goods from Jozax on credit for P772,800 terms: FOB
Destination 4/10 n/30. Freight cost is P15,000 and Vojee advanced the payment of freight to
the shipping company. After 3 days, Vojee received credit memo from Jozax for goods
returned for P101,360. Vojee paid the balance within the discount period.
Required: Compute for
39.The amount of cash paid by Vojee.
Problem 13: Repaa sold goods to Zigko for cash with a catalogue price of P302,000 and
with trade discount of 5%, 8%, 12%. Repaa Co. is a VAT-registered business. Sales is VAT
exclusive.
Required: Compute for the
40.Amount due from Zigko.
41.Sales
Problem 14: The following information is available for Sazzu Company relating to 2013
operations: (Disregard the effect of VAT)
Accounts Receivable, January 1
Accounts Receivable Collected
Cash Sales
Inventory, January 1
Inventory, December 31
Purchases
Gross Margin on Sales

4,000,000
8,400,000
2,000,000
4,800,000
4,400,000
8,000,000
4,200,000

Required:
42.What is the balance of accounts receivable on December 31, 2013?
43.Total sales?
44.Cost of goods sold?
Problem 15: Thrust Company reports operating expenses in two categories: distribution
and general & administrative. The adjusted trial balance on December 31, 2013 included the
following expense and loss accounts:
Accounting and Legal fees
Advertising

1,200,000
1,500,000

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Freight out
Interest
Loss on sale of Equipment
Officers salaries
Rent for office space
Sales salaries and
commissions

800,000
700,000
300,000
2,250,000
2,200,000
1,400,000

of the rented premises is occupied by the sales department.

Required:
45.What amount should be reported as total distribution costs?
Problem 16: The following costs were incurred by Cohag Company during the current year:
Accounting and Legal fees
Freight in
Freight out
Officers salaries
Insurance
Sales representative salaries

250,000
1,750,000
1,600,000
1,500,000
850,000
2,150,000

Required:
46.What amount should be reported as general and administrative expenses?
Problem 17: The following information is available from Vast Cold Companys accounting
records for the current year:
Purchases
Purchase discounts
Beginning inventory
Ending inventory
Freight Out

5,300,000
100,000
1,600,000
2,150,000
400,000

Required:
47.What is the cost of sales for the current year?
Problem 18: The following information is available for Fohossi Company for the current
year:
Disbursements for purchases
Increase in trade accounts payable
Decrease in inventory

5,800,000
500,000
200,000

Required:
48.What is the cost of sales for the current year?
Problem 19: The following information is available from the records of Bajux Company for
the current year:
Beginning Inventory
Freight in
Purchase Returns
Ending Inventory
Selling expenses

400,000
300,000
900,000
500,000
1,250,000

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Sales discounts

250,000

The cost of goods sold is six times the selling expenses.

Required:
49.What is the amount of Gross Purchases?
50.What is the amount of Cost of Goods Purchased?
Problem 20: Bliss Company is using the periodic inventory system. For the year, its total
purchases amounted to P 250,000. Its unsold merchandise at the end of the year has a cost
of P 5,000 which is 80% of its beginning inventory.
51.Bliss cost of sales for the year is?
Problem 21: The following data pertain to the two-year operation of Faith Business
Sales
Purchases
Ending
inventory

Year 1
P 200,000
250,000
90,000

Year 2
P 250,000
150,000
40,000

52.What is the business gross profit on year 1?

53.What is the business gross profit on year 2?
Problem 22: The cost of sale is P 250,000. Total purchases amounted to P 300,000 which
increased the total goods available for sale to P 310,000.
54.How much is the ending inventory?
Problem 23: The gross profit is P 100,000; goods available for sale, P 1,100,000; beginning
inventory, P 100,000; purchases, P 1,000,000 and sales, P 1,000,000.
55.How much is the ending inventory?
Believe in yourself! Have faith in your abilities! Without a humble but
reasonable confidence in your own powers you cannot be successful or happy.
~Norman Vincent Peale

Suggested Key
I.
A.
1.
2.
3.
4.
5.

CONCEPTUAL SKILLS
True or False
A
B
B
A
A

9. B
10. A
11. A
12. B
13. B

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6. A
7. A
8. A
B. Multiple Choice
1. B
2. D
3. D
4. B
5. C
6. D
7. C
8. D
9. D
10. A
11. D
12. A
13. A

14. B
15. A

14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.

A
C
D
C
A
B
C
A
C
B
C
D

II.
COMPUTATIONAL AND ANALYTICAL SKILLS
1. P 1,607,500
30. P363,300
2. P 884,000
31. P204,000
3. P 85,000
32. P102,000
4. P 22,500
33. P142,800
5. P 402,500
34. P1,600,000
6. P 7,260
35. P400,000
7. P 203 or P 180
36. P150,000
8. P 940
37. P 1,471,000
9. P 30,267 or P 30,380
38. P181,000
10. P 3,950
39. P629,582 or P 632,460
11. P 3,050
40. P260,147
12. P 68,380 or P 68,530
41. P232,274
13. P61,054
42. P6,200,000
14. P24,374
43. P12,600,000
15. P21,374
44. P8,400,000
16. 0
45. P4,800,000
17. P 114,750
46. P2,600,000
18. P 148,039
47. P4,650,000
19. P 165,804
48. P6,500,000
20. P 4,579
49. P8,500,000
21. P488,760 or 492,000
50. P7,600,000
22. P96,000
51. P 251,250
23. P700,176
52. P 40,000
24. P554,768
53. P 50,000
25. P1,216,222
54. P 60,000
26. P2,156,700
55. P 200,000
27. P180,416
Some items have two answers. This is
due to the VAT on Sales discounts.
28. P7,461,300
Based on your book, Sales discount can
29. P895,356

decrease Output tax. Based on Tax

code, Sales discounts based on future
events is not allowed to reduce Output

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VAT. Ask your professors whats their
stand about this.

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