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Q 5PSA

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Financial & Managerial Accounting
Found in: Page 215
Financial & Managerial Accounting

Financial & Managerial Accounting

Book edition 7th
Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta
Pages 1096 pages
ISBN 9781259726705

Short Answer

The following unadjusted trial balance is prepared at fiscal year-end for Nelson Company.

NELSON COMPANY
Unadjusted Trial Balance
January 31, 2017

Debit

Credit

Cash

$1,000

Merchandise inventory

12,500

Store supplies

5,800

Prepaid insurance

2,400

Store equipment

42,900

Accumulated depreciation – store equipment

$15,250

Account payable

10,000

Common stock

5,000

Retained earnings

27,000

Dividends

2,200

Sales

111,950

Sales discount

2,000

Sales return and allowance

2,200

Cost of goods sold

38,400

Depreciation expenses – store equipment

0

Salaries expenses

35,000

Insurance expense

0

Rent expense

15,000

Store supplies expense

0

Advertising expense

9,800

Total

$169,200

$169,200

Rent expense and salaries expense are equally divided between selling activities and general and administrative activities. Nelson Company uses a perpetual inventory system.

Required

1. Prepare adjusting journal entries to reflect each of the following:

a. Store supplies still available at fiscal year-end amount to $1,750.

b. Expired insurance, an administrative expense, for the fiscal year is $1,400.

c. Depreciation expense on store equipment, a selling expense, is $1,525 for the fiscal year.

d. To estimate shrinkage, a physical count of ending merchandise inventory is taken. It shows $10,900 of inventory is still available at fiscal year-end.

2. Prepare a multiple-step income statement for fiscal year 2017 that begins with gross sales and includes separate categories for net sales, cost of goods sold, selling expenses, and general and administrative expenses.

3. Prepare a single-step income statement for fiscal year 2017.

4. Compute the current ratio, acid-test ratio, and gross margin ratio as of January 31, 2017. (Round ratios to two decimals.)

  1. Both sides of journal entries total to $8,575.
  2. Net income of the business entity is $975.
  3. Current ratio: 1.56, Acid test ratio: 0.1, Gross margin ratio: 63.82%.
See the step by step solution

Step by Step Solution

Step-by-Step SolutionStep 1: Definition of Adjusting Entries

The journal entries made at year-end for updating the balances of both temporary and permanent accounts are known as adjusting entries.

Step 2: Adjusting entries

Date

Accounts and Explanation

Debit $

Credit $

a.

Supplies expenses

$4,050

Store supplies

$4,050

b.

Insurance expense

1,400

Prepaid insurance

1,400

c.

Depreciation expense – store equipment

1,525

Accumulated depreciation – store equipment

1,525

d.

Inventory shrinkage

1,600

Merchandise inventory

1,600

$8,575

$8,575

Step 3: Multi-step income statement

Particular

Amount $

Amount $

Sales

$111,950

Less: Sales discount

(2,000)

Inventory shrinkage

(1,600)

Less: Sales return and allowance

(2,200)

Net sales

$106,150

Less: Cost of goods sold

(38,400)

Gross profit

67,750

Less: Expenses

Depreciation expenses – store equipment

1,525

Salaries expenses

35,000

Insurance expense

1,400

Rent expense

15,000

Store supplies expense

4,050

Advertising expense

9,800

(66,775)

Net income

$975

Step 4: Single-step income statement

Particular

Amount $

Amount $

Sales

$111,950

Less: Sales discount

(2,000)

Inventory shrinkage

(1,600)

Less: Sales return and allowance

(2,200)

Net sales

$106,150

Less: Cost of goods sold

38,400

Depreciation expenses – store equipment

1,525

Salaries expenses

35,000

Insurance expense

1,400

Rent expense

15,000

Store supplies expense

4,050

Advertising expense

9,800

(105,175)

Net income

$975

Step 5: Financial Ratios

Current ratio:

Acid test ratio:

Gross margin ratio:

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