Lecture Notes/Principles of Accounting-I (AcFn-201)/2008©TG

Chapter-3 Accounting for a Merchandising Enterprise

3.1 Introduction
1. Definition – Merchandising enterprise refers to a business organization which buys finished products
and resells them to its customers for profit. E.g. supermarkets, drugstores, stationery shops, car
dealers, electronic shops, etc

Assets held for resale in the normal course of business of a merchandising enterprise are called
merchandise inventory.

2. Classification
o wholesaler – buys/imports and distributes/sells to retailers
o retailer – buys from wholesaler/manufacturers and sells directly to consumers.

3. Characteristics – The following points distinguish a merchandising enterprise from other types of
businesses:
o difference between merchandising and service enterprises
 A merchandising enterprise sells finished products rather than services and revenues from sells
of finished goods are called sales.
 A merchandising business has two types of major expenses - cost of goods sold which
represent expired cost of merchandise sold and operating expenses which represent all other
expenses necessary to run the business.
 In a merchandising business net income is calculated after two steps: first gross profit is
determined to be the difference between sales and cost of goods sold and then net income is
determined by deducting operating expenses from gross profit.
 A merchandising business uses relatively more types of accounts including sales and purchase
related ones (discussed in subsequent sections).
o difference between merchandising and manufacturing enterprises
 A merchandising enterprise does not manufacture products rather buy them from
manufacturers or other merchandisers.

4. Major activities
o buying and selling merchandise inventory

5. Accounting
o Though there are some basic differences between merchandising enterprise and the other types of
businesses, accounting cycle is equally applicable to any kind of business. Like in the other
organizations, the following apply in accounting for financial affairs of a merchandising business
 Double entry accounting and the rules of debts and credits
 Use of various types and classes of accounts
 Use of journals and ledgers
 Preparation of financial statements
o Accounting for a merchandising business is usually divided into two broad categories –
accounting for purchases and accounting for sales which are covered in the following sections.

3.2 Accounting for Purchases

1. Purchasing Procedures – The purchasing of merchandise inventory in a merchandising business may
involve the following procedures
o Issuance of purchase requisition – a business form usually prepared by the storekeeper

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requesting the purchasing department of a business for purchase of certain types and quantities of
inventory items not available in store.
o Issuance of purchase order – a business form issued by the purchase department requesting
vendors to supply the business with certain types and quantities of inventory on a specified date
and at an agreed upon price. This form usually contains information such as the type and quantity
of inventory ordered, price, and terms of payment and transportation.
o Preparation of receiving report – a business form usually prepared by the storekeeper
evidencing the types, amounts and conditions of inventory received from vendors.
o Recording purchase – keeping record of purchases which is done by the accounts department of
a business. Journal entries are prepared after checking the consistency of information contained in
three basic purchase source documents: purchase order, receiving report and purchase invoice.
o Settlement of invoices – this refers to making cash payments for inventories purchased and is
done after checking the accuracy and validity of the invoice to be settled.

2. Recording Purchases – Purchases of merchandise inventory are recorded and accumulated in a

general ledger account called Purchases. Purchases is an income statement account to be closed at the
end of each accounting period to the Income Summary or to Cost of Goods Sold account. It has a
debit normal balance. The following entries are needed to record purchases of merchandise inventory:
Purchases xx
Accounts Payable/Cash xx

Example 3-1
On May 2, 2004, DNN Drugstore purchased $65,000 worth of drugs and sanitary products
(insulin, toothpaste, etc) from ZAF Pharmaceuticals. 20% of the purchases are on cash and the
remaining are on credit.

Required: Record the above transactions for

a) DNN
b) ZAF

3. Deductions from Purchases – refer to reductions in the cost of purchases as a result of such
transactions as early payment of purchase invoices, returns of damaged or defective goods and/or
price reduction received from sellers for minor defects on goods purchased.

i) Purchase Discounts – When goods are sold on credit, sellers usually offer price reduction called
cash discounts to encourage buyers to pay invoices early. Such price reductions are identified by
the purchaser as Purchase Discounts and recorded as a credit to Purchase Discounts account,
while the seller identifies them as Sales Discounts and records them as a debit to Sales Discounts
account. Purchase discounts and sales discounts are contra accounts reported as deductions from
purchases and sales, respectively.

Agreements between the buyer and the seller concerning such issues as to when to make payment
for the goods, who will pay for transportation, who owns goods in transit, etc are collectively
called sales/purchase terms. Credit terms, part of the sales terms, refer to arrangements between
the buyer and the seller as to when to pay for purchases on credit. The credit terms indicate

o Credit period – the time period within which the invoice for credit purchase is due. For example,
net 30 days (usually written as n/30) means that the amount is due 30 days from the date of
invoice. Other terms include n/45 and n/eom (net due by the end of the month in which the
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purchase was made).

o Discount rate and period – Discount rate represents cash discount expressed in percentage of the
invoice amount. Discount period is time period, shorter than the credit period, within which the
invoice must be entirely or partly paid to get the stated discount. For example, 2/10 indicates that
the buyer can get 2% discount if it settles the invoice within 10 days from the date of the invoice.
Discounts are applicable to only amount of invoice paid within the discount period and on invoice
amount net of returns and allowances (discussed below).

The following entry is made by the buyer for invoices paid within the discount period:
Accounts Payable xx
Purchase Discount xx
Cash xx

Example 3-2
On May 1, 2004, DNN Drugstore purchased $24,000 of drugs and sanitary products from ZAF
Pharmaceuticals, terms 2/10, n/30. DNN paid the invoice in full on May 11, 2004.

Required: Record the above transactions for

a) DNN
b) ZAF

ii) Trade Discounts – refer to reduction from list prices of goods. They help sellers to adjust list
prices without changing price catalogs and/or charge different prices to different customers based
on the quantity of goods bought. For example, sellers do not charge the same price for small and
large quantity purchases. In our country, trade discounts are commonly identified as Big
Discounts and are used to reduce selling prices of goods so as to attract buyers especially during
holiday weeks. Trade discounts are used to determine the actual invoice price of goods and do not
appear in the accounting records.

Example 3-3
On May 5, 2004, Merewa Music Shop purchased 100 tape recorders from Sky Electronics, terms
2/10, n/30. The tape recorders are listed at $400 each subject to 30% trade discount. Merewa paid
for 60 of the tape recorders on March 15, 2004.
Required: Record the above transactions for
a) Merewa
b) Sky

iii) Purchase Returns and Allowances – When goods purchased are damaged or found to be
defective or with the wrong color and size, the buyer may take any of the following actions
depending mainly upon the extent of the damage or defect:
o Return the goods and get credit (reduction in amount payable to the seller) or refund for the value
of the returned goods resulting in Purchase Returns to the buyer and Sales Returns to the seller.
o Keep the goods but ask for price adjustment which when approved by the seller results in
Purchase Allowances for the buyer and Sales Allowances for the seller.

Returns and allowances are recorded by the purchaser as credit to Purchases Returns and
Allowances - a contra purchases account while the seller records them as a debit to contra sales
account called Sales Returns and Allowances. The purchaser issues a document called debit
memo to request credit for returns and allowances and the seller issues a credit memo to notify its
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acceptance of the buyer’s request for credit.

The following entry is made by the buyer when it receives credit memo from the seller for returns
and allowances:
Accounts Payable/Cash xx
Purchase Returns and Allowances xx

Gross purchases – (purchase discounts + purchase returns and allowances) = Net purchases

Example 3-4
On May 1, 2004, DNN Drugstore purchased $54,000 of sanitary products from AFCO Sanitary
Products Share Co, terms 2/10, n/eom. On May 5, 2004 DNN discovered and returned $10,000 of
defective goods and on the same date received credit memo from ZAF Pharmaceuticals
acknowledging the returns. DNN settled the outstanding balance in full on May 11, 2004.

Required: Record the above transactions for

a) DNN
b) AFCO

iv) Shipment Terms – are usually parts of credit terms specifying the party responsible for paying
transportation costs and transfer of ownership of goods sold/bought. There are two common
shipment terms:
 FOB (Free On Board) Shipping Point – This means that ownership of the goods passes from
the seller to the buyer at shipping point or right after the goods leave the store of the seller.
Under this term the buyer owns the goods in transit and will cover all freight costs.

 FOB Destination – This means that ownership of the goods will not pass from the seller to the
buyer until the goods reach their destination i.e. the buyer’s location or store. Under this term
the seller owns the goods in transit and covers all freight costs.

Transportation costs are recorded by the buyer as a debit to an account called Freight or
Transportation In as shown below. By the end of an accounting period, the balance of this
account is added to the purchases account to determine total cost of purchases during a given
period.
Freight-in xx
Cash xx

The seller, if responsible to cover for transportation costs, records transportation costs paid as
operating expenses by debiting an expense account called Delivery Expense or
Transportation/Freight Out as follows.
Freight-Out/Delivery Expense xx
Cash xx

Example 3-5
On May 1, 2004, DNN Drugstore purchased $60,000 of drugs from NAN Drugs Factory, terms
2/10, n/eom, FOB Shipping point and paid $2,000 for transportation. DNN settled the invoice in
full on May 11, 2004.

Required: Record the above transactions for

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a) DNN
b) NAN

In some cases, the seller may pay for transportation costs on behalf of the buyer under FOB
Shipping point terms. In such cases, the seller will add the mount paid to the invoice price and
record it as a debit to Accounts Receivable increasing the mount due from the buyer. The buyer, in
its part will record the amount as a credit to the Accounts Payable account increasing the amount
payable to the seller and as a debit to freight-in account. Prepaid transportation costs are not
subject to discount.

Example 3-6
On June 1, 2004, DNN Drugstore purchased $32,000 of drugs and sanitary products from ZAF
Pharmaceuticals, terms 2/10, n/45, FOB Shipping point. ZAF Pharmaceuticals paid $500 cash for
transportation and added it to the invoice. DNN settled the invoice in full on June 11, 2004.

Required: Record the above transactions for

a) DNN
b) ZAF

3.3 Accounting for Sales

1. Selling Procedures – The selling process may involve the following procedures
 Approving purchase orders – usually done by the credit department of a business, this step
involves making sure that incoming purchase orders are valid and the information related to
price and product type match with the currently available price policy and types of product.
Besides, if the buyer is requesting for credit, this procedure aims at making sure that such
buyer worth giving credit. When a purchase order is approved it will be converted into a sales
order.
 Inventory dispatch order – a form prepared by the sales department ordering the store to ship
certain inventory items to a buyer whose purchase order is approved.
 Issuance of sales invoice – done by the accounts section in consultation with the sales
department and the store, contains the terms related to payment, transportation and related
issues. Is prepared based on information contained on customer purchase order, inventory
dispatch order and sales order.
 Recording sales – keeping record of sales which is done by the accounts department of a
business. Journal entries are prepared after checking the consistency of information contained
in three basic sales source documents: sales order, inventory dispatch order and sales invoice.
 Collection of invoices – this refers to collection of cash from customers for inventories sold to
them.

2. Recording Sales – Sales of merchandise inventory are recorded and accumulated in a general ledger
account called Sales. This is an income statement account to be closed at the end of each accounting
period to Income Summary. As a revenue account, it has a credit normal balance. The following
entries are needed to record sales of merchandise inventory:
Accounts Receivable/Cash xx
Sales xx

Example 3-7
On June 1, 2004, DNN Drugstore sold $32,000 of sanitary products to Nanu Hospital. 30% of the
sales are on cash and the remaining are on credit, terms 2/10, n/30.
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Required: Record the above transactions for

a) DNN
b) Nanu

3. Deductions from Sales – refer to reductions from the total sales arising from such transactions as
early settlement of invoice by customers, returns of damaged or defective goods and/or price
reduction offered for minor defects of goods sold to customers.

i) Sales Discounts – Refer to discounts taken by customers who settle their accounts within the
discount period. Sales discounts are recorded as a debit to the Sales Discounts, contra sales
account whose balance is reported on the income statement as a deduction from the related sales.

The following entry is made by the seller to record invoices settled within the discount period:
Cash xx
Sales Discount xx
Accounts Receivable xx
Example 3-8
On June 11, 2004, DNN Drugstore received cash from Nanu Hospital in full settlement for the
credit sales made on June 1, 2004 in example 3-7 above.

Required: Record the above transactions for

a) DNN
b) Nanu

ii) Trade Discounts – refer to reduction from list prices of goods which are used to adjust list prices
without changing price catalogs and/or charge different prices to different customers based on the
quantity of goods bought. Trade discounts are used to determine the actual invoice price of goods
and do not appear in the accounting records.

Example 3-9
On March 5, 2004, DNN Drugstore sold $40,000 of drugs subject to 20% trade discount to AAT
Clinic, terms 2/10, n/30. AAT settled the invoice in full on March 15, 2004.

Required: Record the above transactions for

a) DNN
b) AAT

iii) Sales Returns and Allowances - arise when credit is given to customers returning unsatisfactory
goods and/or requesting for price adjustment for such goods.

Returns and allowances are recorded as a debit to the Sales Returns and Allowances, a contra
sales account whose balance will be reported on the income statement as a deduction from the
related sales.

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The following entry is made to record issuance of credit memo to customers for returns and
allowances:
Sales Returns and Allowance xx
Accounts Receivable/Cash xx
Gross sales – (sales discounts + sales returns and allowances) = Net sales

Example 3-10
On March 15, 2004, DNN Drugstore sold $40,000 of drugs and sanitary products to AAT Clinic,
terms 2/15, n/30. On March 17, 2004, AAT returned $5,000 of defective goods and DNN issued
credit memo for the returned goods. AAT settled the invoice in full on March 30, 2004.

Required: Record the above transactions for

a) DNN
b) AAT

iv) Shipment Terms – determine ownership of goods in transit and the party responsible for payment
of transportation costs. Two shipment terms
 FOB Shipping Point – buyer owns goods in transit and pays for transportation costs.
 FOB Destination – seller owns goods in transit and pays for transportation costs, and records
them as follows.
Freight-Out/Delivery Expenses xx
Cash xx

Example 3-11
On May 1, 2004, DNN Drugstore sold $30,000 of sanitary products to AX Laboratory, terms 2/10,
n/30, FOB Destination and paid $2,000 cash for transportation. On May 11, 2004, AX settled its
invoice in full.

Required: Record the above transactions for

a) DNN
b) AX

Example 3-12
On May 1, 2004, DNN Drugstore sold $30,000 of sanitary products to AX Laboratory, terms 2/10,
n/30, FOB Destination. AX paid $2,000 cash for transportation. On May 11, 2004, AX settled its
invoice in full.

Required: Record the above transactions for

a) DNN
b) AX

v) Sales Tax (Value Added Tax) – refers to a tax levied on buyers of certain goods and services. The
seller is responsible by law to collect sales tax from its customers and regularly submit them to the
tax authority. Until remitted, sales taxes are recorded by the seller as liability as follows:
Accounts Receivable/Cash xx
Sales Tax Payable xx

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Sales taxes are calculated on invoice prices less returns and allowances. However, sales discounts
are not exempted from sales taxes. The transportation company has to collect taxes on
transportation services it sell to its customers.

Example 3-13
On January 21, 2004, DNN Drugstore sold $80,000 of sanitary products subject to a 2% sales tax
and 10% trade discount to AX Laboratory, terms 2/10, n/30, FOB Shipping Point. DNN paid
$2,000 for transportation and added it to the invoice. On January 23, 2004, AX returned defective
goods with an invoice price of $10,000 excluding sales tax. On January 31, 2004, AX settled its
invoice in full.

Required: Record the above transactions for

a) DNN
b) AX

3.4 Merchandise Inventory Systems

1. Definition
 merchandise inventory systems refer to approaches of
o recording purchases and sales of merchandise inventory
o determining cost of inventory sold during an accounting period
o determining cost of inventory remained on hand by the end of an accounting period
 two merchandise inventory systems: periodic and perpetual.

2. Periodic Inventory System

 relies on detail listing of inventory on hand (called physical inventory) to know ending inventory
and cost of goods sold
 keep records for inventory cost (and quantity) changes due to acquisition (purchases), cash
discount (purchase discounts), returns and allowances (purchase returns and allowances) and
transportation (freight in)
 does not record decreases in inventory due to sale to customers
 at the time of sale only revenue from sales is recorded and no attempt is made to record cost of
goods sold
 ending inventory is known only at the end of an accounting period by taking physical inventory
 cost of goods sold is also determined at the end of an accounting period after taking physical
inventory as follows
Beginning Merchandise Inventory.................................................. $xxx
Add: Gross Purchases................................................................. $xxx
Less: Purchase Discounts, Returns and Allowances……… (xxx)
Net purchases………………………………………………….. $xxx
Add: Freight in………………………………………………… xxx
Cost of merchandise purchased………………………………………. xxx
Merchandise Available for Sale...................................................... $xxx
Less: Ending Merchandise Inventory (known by physical count).. (xxx)
Cost of Goods Sold........................................................................... $xxx

 any inventory not on hand by the end of an accounting period is assumed to sold
 does not provide timely inventory information for preparation of financial statements and
inventory control

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 used by sellers of high-volume low-cost inventory items such as stationery shops and drug stores
 the following entries are made to handle inventory transactions
o to record purchases and transportation costs paid
Purchases xx
Transportation-in xx
Accounts payable/cash xx

o to record purchase discounts, returns and allowances

Accounts payable/cash xx
Purchase discounts xx
Purchases returns and allowances xx

o to record sales
Accounts receivable/ cash xx
Sales xx

o to record sales discounts, returns and allowances

Sales discounts xx
Sales returns and allowances xx
Accounts receivable/cash xx

o to adjusting inventory
Merchandise inventory (ending) xx
Income summary xx

Income summary xx
Merchandise inventory (beginning) xx

3. Perpetual Inventory System

 relies on detail inventory quantity and cost records
 keeps continuous records of each and every change in inventory
 provides perpetual timely inventory information
 strong internal control over inventory
 physical inventory is needed for ascertaining accuracy of perpetual inventory records
 used by sellers of low-volume high-cost inventory items such as car/computer dealers
 the merchandise inventory account is used to record all changes in inventory cost and quantity
 the following entries are made to handle inventory transactions
o to record purchases and transportation costs paid
Merchandise inventory xx
Accounts payable/cash xx
o to record purchase discounts, returns and allowances
Accounts payable/cash xx
Merchandise inventory xx
o to record sales
Accounts receivable/ cash xx
Cost of goods sold xx
Sales xx
Merchandise inventory xx
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o to record sales discounts, returns and allowances

Sales discounts xx
Sales returns and allowances xx
Merchandise inventory (returns)
Accounts receivable/cash xx
Cost of goods sold xx
o to adjusting inventory difference (difference between physical inventory and perpetual
inventory record balances)
Merchandise inventory (excess inventory) xx
Cost of goods sold (shrinkage) xx
Cost of goods sold xx
Merchandise inventory (shrinkage) xx

Example 3-14
Below are transactions completed by ABC Share Co for the month of January 2004:
a) inventory of $10,000 was on hand at the beginning of the month
b) purchased $20,000 of merchandise on account from BC Co, terms 2/10, n/30, FOB
Shipping point and paid $3,000 cash for transportation
c) returned $5,000 of defective goods to BC and received credit memo
d) sold, terms 2/10, n/30, $12,000 of merchandise to AX Co which cost ABC $8,000
e) paid in full amount due to BC within the discount period
f) issued credit memo for $4,000 of unsatisfactory (no defect) merchandise returned by
AX Co. which cost ABC $2,500
g) collected within the discount period amount due from AX
h) physical inventory showed $20,000 of merchandise inventory

Required: Record the above transactions and determine CGS for ABC under
i) periodic inventory system
ii) perpetual inventory system

3.5 Financial Reporting

1. Financial Statements
 Income statement
 Two forms
i) Single-step
o has two sections only: total revenues and total expenses
o no details of net sales, cost of goods sold, operating expenses, etc
o net income is computed in a single step by deducting total expenses from total revenues
o revenues
 net sales
 rent income
 other income
o cost and expenses
 cost of goods sold
 selling expenses
 administrative expenses
 other expense
o net income = total revenues – total expenses

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ii) Multiple-step
o shows in detail net sales, cost of goods sold, operating expenses and other items
o you have to go several steps to compute net income
o has several sections, subsections, totals and intermediate balances

Gross sales xx
Less: Sales discounts……………………………………. xx
Sales returns and allowances……………………… xx (xx)
Net sales $xx
Cost of goods sold:
Beginning Merchandise Inventory...................................... $xxx
Add: Gross Purchases....................................................... $xxx
Less: Purchase Discount, Return and Allowance… (xxx)
Net purchases…………………………………….. $xxx
Add: Freight in…………………………………… xxx
Cost of merchandise purchased…………………………... xxx
Merchandise Available for Sale.......................................... $xxx
Less: Ending Merchandise Inventory (physical count)….... (xxx)
Cost of Goods Sold (xx)
Gross profit $xx
Operating expenses:
Selling expenses (see below for detail)
total selling expenses……………………………. $xx
Administrative expenses (see below for detail)
total administrative expenses……………………. xx
Total operating expenses (xx)
Net income $xx

o Operating expenses section

 Selling expenses which comprise all expenses incurred in connection with selling
activities including sales salary expenses, delivery expenses, advertising expenses,
store supplies expenses, depreciation on store equipment, etc.
 Administrative/general expenses which comprise all expenses incurred in connection
with administration or general operations including office salary expenses, utility
expenses, office supplies expenses, depreciation on office equipment, etc.
o Other income and expenses section
 rent income, interest income, gain from disposal of plant assets, etc
 interest expenses, loss from disposal of plant assets, etc
 Capital statement
 Balance sheet – report and account forms
 Statement of cash flows

2. Adjusting entries
 make adjustment for all accrued and deferred items
 adjustment of merchandise inventory
 periodic
o to remove beginning inventory (which is assumed to be sold)
Income summary xx
Merchandise inventory xx
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o to record ending inventory (known by physical count)

Merchandise inventory xx
Income summary xx
 perpetual if there is inventory shortage/overage
Merchandise inventory (excess inventory) xx
Cost of goods sold (shrinkage) xx
Cost of goods sold xx
Merchandise inventory (shrinkage) xx

3. Closing entries
 close all revenue and contra purchase accounts to Income Summary account
Sales xx
Rent Income xx
Purchases Discount xx
Purchases Returns and Allowances xx
Income Summary xx

 close all purchases, expenses and contra sales accounts to Income Summary account
Income Summary xx
Purchases xx
Freight-in xx
Sales Discounts xx
Sales Returns and Allowances xx
Salary Expense xx
Rent Expense xx
Miscellaneous Expenses xx

 close debit or credit balance of Income Summary to capital account

Income Summary (credit balance) xx
AA, Capital xx

 close drawing account to capital account

AA, Capital xx
AA, Drawing xx

Example 3-15
The unadjusted trial balance for XYZ Pharmacy on December 31, 2003 is presented on the next
page with additional information provided below.

Additional Information:
a) Merchandise Inventory as of December 31, 2003................................ $70,000
b) Interest accrued on long-term notes payable on December 31, 2003... 320
c) Office Supplies as of December 31, 2003............................................ 1,300
d) Insurance expired during 2003.............................................................. 1,200
e) Depreciation during 2003 on:-
Store equipment............................................................................. 3,200
Office equipment………………………………………………... 2,580

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f) Salaries accrued on December 31, 2003

Sales Salaries……………………………………………………. 900
Office Salaries…………………………………………………… 1,400
g) Rent Income Earned during 2003…………………………………….. 3,000

XYZ Pharmacy
Trial Balance
As of December 31, 2003
Account Title Debit Credit
Cash........................................................…………………. 87,400  
Notes Receivable.......................................……………….. 30,200  
Accounts Receivable..................................………………. 74,150  
Merchandise Inventory....................................................... 60,000  
Office Supplies.................................................................... 2,200  
Prepaid Insurance………………………………………… 4,400  
Store Equipment.................................................................. 38,100  
Accumulated Depreciation-Store Equipment......................   2,600
Office Equipment.......................................... ……………. 26,400  
Accumulated Depreciation-Office Equipment....................   2,400
Accounts Payable................................................................   12,000
Sales Tax Payable…………………………………………   2,700
Unearned Rent.....................................................................   24,000
Long-term Notes Payable....................................................   25,000
Kebede, Capital...................................................................   125,000
Kebede, Drawing................................................................. 14,700  
Sales.....................................................................................   700,000
Sales Returns & Allowances............................................... 8,000  
Sales Discounts…………………………………………… 7,000  
Purchases……..…………………………………………... 420,000  
Purchase Returns & Allowances………………………….   9,100
Purchase Discounts……………………………………….   4,900
Transportation-In…………………………………………. 15,000  
Sales Salaries Expense…………………………………… 25,400  
Advertising Expense……………………………………… 14,300  
Miscellaneous Selling Expense…………………………... 8,200  
Office Salaries Expense………………………………….. 44,000  
Rent Expense…………………………………………….. 18,000  
Miscellaneous Administrative……………………………. 7,700  
Interest Expense………………………………………….. 2,550 .  
907,700 907,700
 

Required:
i) Prepare worksheet for XYZ Pharmacy for the year ended December 31, 2003. Key each
adjusting entry by the letter corresponding to the data given.

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ii) Prepare the following financial statement

a) The multiple-step income statement
b) The single-step income statement
c) The report form balance sheet
iii) Journalize the necessary adjusting entries
iv) Journalize closing entries
v) Prepare post-closing trial balance

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