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Accounting for Merchandising, Inventories, and Principles

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Solution Summary

This solution is comprised of several accounting problems that deal with several different topics. These topics include the following:

Journalizing merchandising transactions and preparing a partial income statement.
Preparing financial statements, adjusting entries, and closing entries.
Determining items and amounts to be recorded in inventory.
Determining cost of goods sold and ending inventory using FIFO, LIFO, and average-cost with analysis.
Identifying accounting assumptions, principles, and constraints.
Preparing a multiple-step income statement and analysis of profitability.

The problems shown here are taken from Financial Accounting, 6th ed, Wiley Publishing, however, the detail step-by-step explanation of these complicated topics provides students with a clear understanding of the concepts.

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See attached Excel file for the solution to problems P5-2A, P5-3A, P6-3A, and P7-5A

The solution to problems P6-1A and P7-3A are shown below. An explanation has been noted where it is necessary to understand the step-by-step process.

P6-1A

(a) F.O.B. shipping point means that the seller places the goods free on board the carrier and the buyer pays the freight cost. Therefore the goods should not be included in the inventory. Heath Limited transferred title of the goods to the customer on February 26. Heath should have made an entry to record the transaction in the Sales and Accounts Receivable accounts.

(b) Under the F.O. B. destination means that the seller places the goods free on board to the buyer's place of business, and the seller pays the freight However, the goods were not received until March 2 and therefore the seller still own the inventory. No entry is required.

(c) If Heath had the merchandise at a customer's warehouse, but the customer was going to let it be known by March 4 whether it wanted the merchandise then technically the $500 of merchandise inventory stills belongs to Heath Limited is should be part of the ending inventory.

(d) In some businesses it is common to hold the goods of another and try to sell the ...

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