Question

Problem 1 (25 points) Oliver's Boutique is a retail clothing store for men & women. The store operates out of a rented building in Oviedo, Spain. The following is the store's adjusted year-end trial balance dated December 31, current year. Cash Accounts receivable Merchandise inventory Prepaid rent Office supplies Office equipment Accumulated depreciation: office equipment Accounts payable Sales taxes payable Capital stock Retained earnings Sales Sales returns and allowances Cost of goods sold Purchase discounts lost Utilities expense $ 42,832 $ 5,616 $ 37,800 $ 3,888 $ 1,944 $ 88,560 $ 25,920 $ 27,540 $ 6,912 $ 38,880 45,468 $ 500,160 $ 5,400 $ 219,242 540 $ 8,899 www.euruni.edu

Answer 1

a.

Trading and Profit & Loss account for Jordan's boutique for the year ended December 31,….
Debit		Credit
Particulars	Amount	Particulars	Amount
Cost of goods sold	$219,242	Sales : $500,160
		Less: Sales Returns $5,400
Gross Profit	$275,518	Net Sales	$494,760
	$494,760		$494,760
Profit & Loss Account
Purchase discount lost	$540	Gross Profit	$275,518
Utilities expense	$8,899
Office supply expense	$1,124
Depreciation expense	$5,940
Rent expense	$13,176
Insurance expense	$1,944
Salaries expense	$190,285
Income tax expense	$17,690
Net Profit	$35,920
	$275,518		$275,518

Working notes :

Cash, merchandise inventory, accounts receivables, prepaid rent, office supplies, office equipment are assets and to be reported in balance sheet, not on income statement. Accumulated depreciation is also deducted from Office equipment in balance sheet.

Accounts payable, sales tax payable, capital stock, retained earnings are liabilities to be reported on liabilities side of balance sheet.

Further, utilities expense is treated as administrative/selling category utilities expense, since nothing is mentioned that it is expense manufacturing utilities (in that situation, it would have been reported in trading account)

Purchase discount lost is the discount lost due to non-payment of purchases within due date. So, it is treated as an expense since purchases are originally recorded at discounted price under net method. Now, when the discount is no longer available and cash payment/ accounts payable is higher than discounted purchase cost originally recorded, the difference,i.e, purchase discount lost is treated as an expense and debited in the income statement.

b. Gross Profit margin as a % of net sales = Gross Profit / Net Sales * 100

= $ 275,518 / $ 494,760 * 100

= 55.68%

c. For a judgement on whether the store's customers are satisfied with their purchases, we need to study the sales returns numbers.

Sales returns = $5,400

Gross Sales = $500,160

% of sales returns = $5,400 / $500,160 * 100 = 1.07%, which is a miniscule % of returns.

So, it appears that the store's customers are satisfied with their purchases.

d. It can be said that the store records inventory purchases net of purchase discounts because of the purchase discount lost item in the trial balance. Under net method of inventory purchases, the inventory purchase is recorded in the general at net price,i.e, less of discount. For example, if the business purchases inventory of $1,000 and has terms 2/10 net 30, it means the business will get 2% discount if it pays within 10 days. So, the business will record the purchase as debit to Purchases (inventory) account for $980 and credit to accounts payable for $980. When it makes payment within 10 days, it will debit Accounts payable by $980 and credit cash by $980.

Now, if it does not make payment within 10 days, the cash amount to be paid to seller is $1,000, the balance between this and purchases recorded at $980 is $20 purchase discount lost which is treated as an expense in the income statement.

e. When a business has collected sales tax on its sales from customers, such tax needs to be remitted to federal tax authorities by the business, so it is reported as sales tax payable. It is not an expense for the business.

Sales tax expense is recorded when the business has purchase some article/equipment and paid sales tax on it, so that is an expense for the business.