Question

Claypool Hardware is the only hardware store in a remote area of northern Minnesota. Some of Claypool’s transactions during the current year are as follows.

Nov.	5		Sold lumber on account to Bemidji Construction, $15,390. The inventory subsidiary ledger shows the cost of this merchandise was $10,345.
Nov.	9		Purchased tools on account from Owatonna Tool Company, $4,200.
Dec.	5		Collected in cash the $15,390 account receivable from Bemidji Construction.
Dec.	9		Paid the $4,200 owed to Owatonna Tool Company.
Dec.	31		Claypool’s personnel counted the inventory on hand and determined its cost to be $183,040. The accounting records, however, indicate inventory of $184,990 and a cost of goods sold of $653,247. The physical count of the inventory was observed by the company’s auditors and is considered correct.

Assume that an index of key business ratios in your library shows hardware stores of Claypool’s approximate size (in total assets) average net sales of $1 million per year and a gross profit margin of 32 percent.

Required:

a. Prepare journal entries to record these transactions and events in the accounting records of Claypool Hardware. (The company uses a perpetual inventory system.)

b. Prepare a partial income statement showing the company’s gross profit for the year. (Net sales for the year amount to $1,036,900.)

c. Claypool purchases merchandise inventory at the same wholesale prices as other hardware stores. Due to its remote location, however, the company must pay between $22,000 and $28,000 per year in extra transportation charges to receive delivery of merchandise. (These additional charges are included in the amount shown as cost of goods sold.)

d. Does the business appear to suffer or benefit financially from its remote location?

Answer 1