Skip to main content

Chapter 6 – Exercises & Cases

Multiple Choice Questions​

  1. A merchandising business's income statement includes which of the following that a service business does not?
    a) Revenue
    b) Expenses
    c) Cost of Goods Sold
    d) Net Income
    Answer: c) Cost of Goods Sold is unique to merchandising businesses.

  2. In a perpetual inventory system, when is cost of goods sold recorded?
    a) At period end only
    b) At the time of each sale
    c) When inventory is purchased
    d) Never recorded
    Answer: b) In perpetual system, COGS is recorded at the time of each sale.

  3. Which PCN account is used for merchandise inventory in a retail store?
    a) 300000
    b) 310000
    c) 320000
    d) 321000

    Answer: d) 321000 is Merchandise (Marchandises) for retail inventory.

  4. Gross profit is calculated as:
    a) Sales - Operating Expenses
    b) Sales - Cost of Goods Sold
    c) Net Income - Expenses
    d) Revenue - All Costs
    Answer: b) Gross Profit = Sales Revenue - Cost of Goods Sold.

  5. In Luxembourg, food products for human consumption are subject to which VAT rate?
    a) 17%
    b) 14%
    c) 8%
    d) 3%

    Answer: d) Food products are subject to 3% VAT (super-reduced rate).

  6. Freight-in should be recorded as:
    a) An operating expense
    b) Part of inventory cost
    c) A separate revenue account
    d) Part of cost of goods sold only
    Answer: b) Freight-in is part of inventory cost, not a separate expense.

  7. In a periodic inventory system, purchases are recorded in:
    a) Inventory account
    b) Purchases account
    c) Cost of Goods Sold account
    d) Expenses account
    Answer: b) Periodic system uses Purchases account (602000), not Inventory.

  8. Net Sales equals:
    a) Gross Sales only
    b) Gross Sales - Sales Returns
    c) Gross Sales - Sales Returns - Sales Allowances - Sales Discounts
    d) Sales Revenue - Cost of Goods Sold
    Answer: c) Net Sales = Gross Sales - Returns - Allowances - Discounts.

  9. Which VAT rate applies to alcoholic beverages sold as merchandise (not in restaurant)?
    a) 3%
    b) 8%
    c) 14%
    d) 17%

    Answer: c) Alcoholic beverages sold as merchandise have 14% VAT.

  10. A multi-step income statement for a merchandising business shows:
    a) Only revenues and expenses
    b) Sales, COGS, Gross Profit, Operating Expenses, Net Income
    c) Only net income
    d) Assets and liabilities
    Answer: b) Multi-step shows Sales, COGS, Gross Profit, Operating Expenses, and Net Income.

Questions​

  1. Explain the difference between a merchandising business and a service business. How do their income statements differ?

  2. Compare and contrast perpetual and periodic inventory systems. What are the advantages and disadvantages of each?

  3. Describe how to record a merchandise purchase in a perpetual inventory system. What accounts are involved, and what are the PCN account numbers?

  4. When merchandise is sold, two journal entries are needed in a perpetual system. Explain what each entry records and why both are necessary.

  5. What is gross profit? Why is it an important measure for merchandising businesses? How is it calculated?

  6. Explain the difference between freight-in and freight-out. How is each recorded, and what PCN accounts are involved?

  7. Compare multi-step and simple income statements. Which format is preferred for merchandising businesses, and why?

  8. How should a Luxembourg business handle different VAT rates on different types of merchandise? What accounts and procedures are needed?

  9. Describe the periodic inventory system. How is cost of goods sold calculated in this system?

  10. A Luxembourg retail store sells children's clothing (3% VAT) and adult clothing (17% VAT). How should sales be recorded and tracked for VAT return preparation?

Problems Set A​

Problem A-1: Recording Purchases

A Luxembourg retail store makes the following purchases. Record each with proper PCN accounts:

a) Purchase €5,000 merchandise on credit (excluding VAT), VAT 17%, recoverable b) Purchase €2,000 children's clothing on credit (excluding VAT), VAT 3%, recoverable c) Purchase €1,000 wine for retail sale on credit (excluding VAT), VAT 14%, recoverable d) Pay €500 freight on purchase (a), VAT 17% on freight

Problem A-2: Recording Sales

Record the following sales in a perpetual inventory system:

a) Sell €3,000 merchandise for cash (excluding VAT), VAT 17%. Cost is €1,800. b) Sell €500 children's clothing on credit (excluding VAT), VAT 3%. Cost is €300. c) Customer returns €200 of merchandise from sale (a). Cost was €120.

Problem A-3: Gross Profit Calculation

Calculate gross profit and gross profit margin from:

  • Net Sales: €100,000
  • Cost of Goods Sold: €60,000

Problem A-4: Income Statement Preparation

Prepare a simple income statement from:

  • Sales Revenue: €80,000
  • Sales Returns: €2,000
  • Cost of Goods Sold: €45,000
  • Operating Expenses: €20,000
  • Net Income: ?

Problem A-5: VAT on Mixed Merchandise

A business sells:

  • Food products: €1,000 (3% VAT)
  • Wine: €500 (14% VAT)
  • General merchandise: €2,000 (17% VAT)

Calculate total sales and total VAT payable. Show journal entries.

Problems Set B​

Problem B-1: Complete Merchandising Cycle

A Luxembourg retail store has the following transactions in December:

  1. Purchase €10,000 merchandise on credit (excluding VAT), VAT 17%
  2. Pay €300 freight (VAT 17% on freight)
  3. Sell €8,000 merchandise for cash (excluding VAT), VAT 17%. Cost is €5,000.
  4. Customer returns €500 merchandise. Cost was €300.
  5. Purchase €2,000 children's clothing (excluding VAT), VAT 3%
  6. Sell €1,000 children's clothing for cash (excluding VAT), VAT 3%. Cost is €600.

Record all transactions using perpetual inventory system with proper PCN accounts.

Problem B-2: Multi-Step Income Statement

Prepare a multi-step income statement from:

  • Sales Revenue: €150,000
  • Sales Returns: €3,000
  • Sales Allowances: €1,000
  • Sales Discounts: €2,000
  • Cost of Goods Sold: €80,000
  • Salaries Expense: €25,000
  • Rent Expense: €8,000
  • Utilities Expense: €2,500
  • Depreciation Expense: €3,000
  • Interest Expense: €500
  • Income Tax Expense: €4,000

Problem B-3: VAT Tracking and Return

A Luxembourg business needs to prepare its VAT return. During the month:

Sales:

  • Food products (3% VAT): €5,000
  • Wine (14% VAT): €2,000
  • General merchandise (17% VAT): €10,000

Purchases:

  • Food (3% VAT): €3,000
  • Wine (14% VAT): €1,500
  • General merchandise (17% VAT): €6,000

Calculate: a) Total VAT Payable b) Total VAT Recoverable c) Net VAT to pay d) Prepare VAT return summary

Problem B-4: Periodic vs. Perpetual Comparison

Compare how the following transaction would be recorded in perpetual vs. periodic systems:

Purchase €5,000 merchandise (excluding VAT), VAT 17%, on credit. Sell €2,000 of that merchandise for €3,000 cash (excluding VAT), VAT 17%. Cost is €2,000.

Show journal entries for both systems.

Comprehensive Problem​

Comprehensive Problem 6: Complete Merchandising Operations

Fashion Boutique Luxembourg SARL is a retail clothing store in Luxembourg City. The following transactions occurred during November 2024:

November 1: Beginning inventory: €20,000

November 3: Purchase €15,000 adult clothing on credit (excluding VAT), VAT 17%, recoverable. Terms: 2/10, n/30.

November 5: Purchase €5,000 children's clothing on credit (excluding VAT), VAT 3%, recoverable.

November 8: Pay €400 freight on November 3 purchase (VAT 17% on freight).

November 10: Pay for November 3 purchase within discount period.

November 12: Sell €8,000 adult clothing for cash (excluding VAT), VAT 17%. Cost is €5,000.

November 15: Sell €2,000 children's clothing on credit (excluding VAT), VAT 3%. Cost is €1,200.

November 18: Customer returns €500 adult clothing from November 12 sale. Cost was €300.

November 20: Purchase €10,000 general merchandise on credit (excluding VAT), VAT 17%.

November 22: Receive payment from November 15 sale.

November 25: Sell €6,000 merchandise for cash (excluding VAT), VAT 17%. Cost is €3,500.

November 28: Pay salaries €3,000.

November 30: Physical inventory count shows ending inventory of €22,000.

Required:

  1. Record all transactions using perpetual inventory system with proper PCN accounts.

  2. Prepare a multi-step income statement for the month ended November 30, 2024.

  3. Calculate:
    a) Net Sales
    b) Gross Profit
    c) Gross Profit Margin
    d) Cost of Goods Sold (verify with formula)

  4. Prepare VAT summary for November:
    a) VAT Payable by rate
    b) VAT Recoverable by rate
    c) Net VAT position

  5. Compare your calculated ending inventory (from transactions) with the physical count. Explain any difference and how it should be handled.

  6. Explain how this business complies with Luxembourg merchandising accounting requirements (PCN, VAT, inventory valuation).

Cases​

Case 6-1: Mixed Business Accounting

Marie's restaurant, Le Petit Bistro, now operates as both a service business (meals) and a merchandising business (wine, coffee beans, merchandise). She's confused about how to account for these different types of sales.

Current Situation:

  • Serves meals (service revenue)
  • Sells wine bottles (merchandise)
  • Sells coffee beans (merchandise)
  • Sells branded merchandise (T-shirts, mugs)

Questions for Analysis:

  1. How should Marie account for service revenue vs. merchandise sales differently?

  2. What PCN accounts should be used for:
    a) Food ingredients (to be cooked)?
    b) Wine inventory (to be sold)?
    c) Coffee beans (to be sold)?
    d) Merchandise inventory?

  3. How should cost of goods sold be calculated for merchandise sales?

  4. What VAT rates apply to each type of sale, and how should they be tracked?

  5. How should the income statement be structured to show both service and merchandising operations?

  6. What are the Luxembourg compliance requirements for this mixed business?

Case 6-2: Inventory System Decision

A new Luxembourg retail store is deciding between perpetual and periodic inventory systems. The store will sell:

  • Children's clothing (3% VAT)
  • Adult clothing (17% VAT)
  • Accessories (17% VAT)

Expected monthly sales: €50,000 Expected inventory value: €30,000 Will use computerized point-of-sale system

Questions for Analysis:

  1. Which inventory system would you recommend? Why?

  2. What are the advantages of your recommended system for this business?

  3. How would the different VAT rates affect the inventory system choice?

  4. What PCN accounts would be needed for your recommended system?

  5. What procedures should be established for inventory management?

  6. How would the system handle:
    a) Purchase returns?
    b) Sales returns?
    c) Physical inventory counts?
    d) VAT tracking?

Solutions are published in supplementary/instructor/solutions/chapter_06_solutions.md.