Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 13 Merchandiser’s Adjustments and Trial Balance

13-2 Learning Objective 1 Use a trial balance for a merchandiser. First, Z-Mart reports $19,000 of merchandise inventory. The work sheet reports Z- Mart’s total sales ($321,000), sales returns and allowances ($2,000), and sales discounts ($4,300). LO1

13-3 Learning Objective 2 Prepare the adjusting entries for inventory. The December 31, 2010, balance in Merchandise Inventory ($19,000) on Z-Mart’s unadjusted trial balance in Exhibit 13.1 has not changed since the beginning of the year. Z-Mart now needs to prepare two adjusting entries using this account. These entries will: 1. Replace the beginning inventory balance with its correct ending balance. 2. Aid in reflecting cost of goods sold in the Income Summary account. The December 31, 2010, balance in Merchandise Inventory ($19,000) on Z-Mart’s unadjusted trial balance in Exhibit 13.1 has not changed since the beginning of the year. Z-Mart now needs to prepare two adjusting entries using this account. These entries will: 1. Replace the beginning inventory balance with its correct ending balance. 2. Aid in reflecting cost of goods sold in the Income Summary account. As part of the closing process, the temporary account Income Summary is used to close temporary accounts. LO2

13-4 Learning Objective 3 Prepare adjusting entries for prepaid and accrued expenses. Adjusting Prepaid Insurance Adjusting Supplies LO3

13-5 Adjusting Prepaid Expenses (Including Depreciation) Adjusting Accrued Expenses LO3

13-6 Learning Objective 4 Compute net sales and net purchases. Net sales is defined as sales minus sales discounts and minus sales returns and allowances. LO4

13-7 Learning Objective 5 Compute cost of goods sold. The cost of merchandise available for sale equals the cost of beginning inventory plus the net purchases for the period. A merchandiser’s balance sheet includes an asset called merchandise inventory. This item is not on a service company’s balance sheet. Merchandise inventory refers to products that a merchandiser owns and intends to sell. Under a periodic inventory system, a merchandiser physically counts the number of inventory items remaining at the end of the period, and assigns them a total cost. LO5

13-8 Learning Objective 6 Compute gross profit. A merchandiser is very interested in generating gross profit by selling products at prices above their costs. Gross profit = Net sales – cost of goods sold LO6

13-9 Learning Objective 7 Prepare the adjusting entry for accrued revenue. Accrued revenues refers to revenues earned in a period that are both unrecorded and not yet received in cash (or other assets) at the end of the period. Accrued revenues commonly arise from services, products, interest, and rent. We use service fees to show how to adjust for accrued revenues. LO7

13-10 Learning Objective 8 Prepare the adjusting entry for unearned revenue. SuperSub has unearned revenues. It agreed on December 1 to provide catered lunches once a week for the local Bikers’ Club for the next 10 weeks. On that same day, the Bikers’ Club paid SuperSub the $3,000 fee covering the entire 10- week period. The entry to record the cash received in advance is: The adjusting entry to reduce the liability account and recognize earned revenue, along with T-account postings, is: LO8

13-11 Links to Financial Statements LO8

13-12 Learning Objective 9 Describe the alternatives in accounting for prepayments. Let’s take a look at SuperSub’s cash payment of $1,800 on December 1 for 18 months of insurance coverage beginning on December 1. SuperSub recorded that payment with a debit to an asset account, but it could have recorded a debit to an expense account. Adjusting Entry for Prepaid Expenses for the Two Alternatives At the end of its accounting period on December 31, insurance protection for one month has expired. Therefore $100 ($1,800/18) of insurance coverage expired and is an expense for December. The adjusting entry depends on how the original payment was recorded. LO9

13-13 Alternative Initial Entries for Unearned Revenues SuperSub has a December 1 receipt of $3,000 for services covering 10 weekly lunches. SuperSub recorded this transaction with a credit to a liability account. The alternative is to record it with a credit to a revenue account. Adjusting Entry for Unearned Revenues for the Two Alternatives By the end of its accounting period on December 31, SuperSub has earned $1,200 of this revenue. This means $1,200 of the liability has been satisfied. depending on how the initial receipt is recorded, the adjusting entry is as shown: LO9

13-14 Account Balances under Two Alternatives for Recording Unearned Revenues After adjusting entries are posted, the two alternatives give identical results. LO9

13-15 End of Chapter 13