1. College Accounting, by Heintz and Parry
Chapter 14:
Adjustments and the Work Sheet for a Merchandising Business

2. The rest of the year flew by at The CD Side of Town
The rest of the year flew by at The CD Side of Town. Their location near campus played a big part in their success, and Eddie certainly convinced all of his friends to frequent the store as much as possible. At year end, the usual process of making adjusting entries began. However, the adjusting entries had some differences from the ones Eddie had made for Eddie and the Losers, because a merchandising business is more complicated. For example, two adjusting entries will be made to the Merchandise Inventory account. To understand why this account needs adjusting, answer the following question: Question: If you look at the balance in the Merchandise Inventory account for a business on Dec. 31, that balance will represent the amount of inventory as of what day?

3. How it relates to your audience
Supporting information and examples
Details about this topic
Answer: The balance of the account should represent merchandise inventory on the first day of the fiscal period (normally January 1). Since Jan. 1, increases in inventory have gone into the purchases account, and decreases have been documented as sales but not as decreases in inventory. At year end, a physical inventory must be taken to see how much inventory is currently owned. This information will be used to calculate cost of goods sold (an expense representing the inventory that was used to generate sales revenue). The calculation is: Merchandise Inventory, Jan Net purchases (including freight-in) Goods Available for Sale Merchandise Inventory, Dec Cost of Goods Sold Therefore, adjusting entries are needed to take out the Jan. 1 Merchandise Inventory balance and put in the Dec. 31 balance.

4. The other half of both entries is Income Summary, because the change in Merchandise Inventory impacts net income through the calculation of Cost of Goods Sold you just reviewed. The entries for The CD Side of Town is shown below. The beginning inventory, totaling $7,683, consists of CDs that Nick bought from a private collector before he opened the store. The ending inventory is $10, Date Description P. R. Debit Credit Adjusting Entries Dec. 31 Income Summary Merchandise Inventory Merchandise Inventory Income Summary

5. There was one other adjusting entry that The CD Side of Town made that Eddie never had to make for his band. In June, Nick purchased the building the store was in. By October, Nick realized that his building was bigger than he needed, so he found a VCR repairperson to rent 25 % of the store space. Because he needed to do some interior remodeling to accommodate his new tenant, Nick asked for six months’ rent in advance. As a result, on November 1, he received $1500 ($250 for each of the following six months). Eddie put it into an account called Unearned Rent Revenue. Question: What kind of an account is Unearned Rent Revenue (hint: it’s not a revenue account)?

6. Answer: This account is a liability account, because at the time of payment, The CD Side of Town owes the tenant services (in this case, the right to use space) worth $ As the six months pass, the business will earn the money and transfer it to a revenue account through adjusting entries. The Dec. 31 adjusting entry would be for two months’ rent (November and December), and 2 X $250/month = $ Date Description P. R. Debit Credit Adjusting Entries Dec. 31 Unearned Rent Revenue Rent Revenue

7. One aspect of the store’s work sheet would be unique
One aspect of the store’s work sheet would be unique. Both the debit and credit adjusting entries to income summary would be carried over to the adjusted trial balance and income statement columns. This is done so that all of the information needed to prepare an income statement is in the income statement columns, including the beginning inventory ($7,683) and ending inventory ($10,218) used to compute cost of goods sold The CD Side of Town Work Sheet For Year Ended Dec. 31, Trial Balance Adjustments Adj. Trial Bal Income Statement Debits Credits Debits Credits Debits Credits Debits Credits Mdse. Inv b)10218 a) Inc. Summ a) 7683b)