Question

Willy’s uncle has let him set up a single person merchandising operation in some spare space in the uncle’s building. Willy has agreed to pay his uncle $1,500 a month to cover rent, utilities and all other expenses. Willy tracks these payments in his books as “rent.” Willy had $400 worth of inventory on hand when he set up shop in his uncle’s building.  Willy uses the periodic inventory method. method. A physical count found $200 worth of inventory at the end of the accounting period.

1. Journalize the transactions. Round to the nearest dollar. Use the following account numbers.

1	1-Mar	$      1,500	First month's rent was paid.
2	2-Mar	$      5,000	List price of inventory purchased by Willy.
		5%	"preferred customer" trade discount was given to Willy.
		4%	Sales discount was offered to Willy if he paid within
		10	days (2/10, n30). Willy paid cash on			2-Mar	.
		$              75	Transportation–in costs, FOB shipping point, were paid by Willy.
3	10-Mar	$   10,000	List price of merchandise sold by Willy with a
		5.0%	Trade discount.
		6.0%	Sales discount was offered by Willy if he were paid within
		10	days (3/10, n30)
4	15-Mar	Willy was paid by the customer for merchandise purchased 10-Mar.
5	20-Mar	$           300	sales allowance was offered by Willy after the customer complained.
			The customer agreed to keep the merchandise due to the allowance

2. Complete the Income Statement

3. Prepare his Classified Income Statement for March.

Answer 1

1.

Transaction / Event	Date	Account Titles	Debit	Credit
			$	$
1.	Mar 1	Rent Expense	1,500
		Cash		1,500
2.	Mar 2	Purchases ( $ 5,000 x 95 % x 96 %)	4,560
		Cash		4,560
	Mar 2	Freight-in	75
		Cash		75
3.	Mar 10	Accounts Receivable ( $ 10,000 x 95 % )	9,500
		Sales		9,500
4.	Mar 15	Cash	9,215
		Sales Discounts ( $ 9,500 x 3 % )	285
		Accounts Receivable		9,500
5.	Mar 20	Sales Returns and Allowance	300
		Cash		300
6.	Mar 31	Ending Inventory	200
		Cost of Goods Sold	4,835
		Purchases		4,560
		Freight-in		75
		Beginning Inventory		400

2.

Income Statement For the month ended March 31
Gross Sales		$ 9,500
Less: Sales Returns and Allowances	$ 300
Less: Sales Discounts	285	585
Net Sales		8,915
Cost of Goods Sold		4,835
Gross Profit		4,080
Rent Expense		(1,500)
Net Operating Income		$ 2,580

Closing Entries:

Date	Account Titles	Debit	Credit
		$	$
March 31	Sales	9,500
	Income Summary		9,500
	To close credit balances to income summary
March 31	Income Summary	6,920
	Cost of Goods Sold		4,835
	Rent Expense		1,500
	Sales Returns and Allowances		300
	Sales Discounts		285
	To close debit balances to income summary
March 31	Income Summary	2,580
	Retained Earnings		2,580
	To close income summary to retained earnings