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Financial & Managerial Accounting
Found in: Page 218
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 Foster Products Company.

Rent expense and salaries expense are equally divided between selling activities and general and administrative activities. Foster Products 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 $3,700.

b. Expired insurance, an administrative expense, for the fiscal year is $2,800.

c. Depreciation expense on store equipment, a selling expense, is $3,000 for the fiscal year.

d. To estimate shrinkage, a physical count of ending merchandise inventory is taken. It shows $21,300 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 October 31, 2017. (Round ratios to two decimals.)

Answer

  1. Both sides of the journal totals $14,500.
  2. Net income of the business entity is $24,000.
  3. Current ratio is 3.32, Quick ratio is 0.41, and gross profit margin is 65.29% for the fiscal year 2017.
See the step by step solution

Step by Step Solution

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

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

Step 2: Adjusting journal entries

Date

Accounts and Explanation

Debit $

Credit $

31 Oct 2017

Store supplies expenses

6,000

Store supplies

6,000

31 Oct 2017

Insurance expenses

2,800

Prepaid insurance

2,800

31 Oct 2017

Depreciation expenses – store equipment

3,000

Accumulated depreciation

3,000

31 Oct 2017

Inventory shrinkage

2,700

Merchandise inventory

2,700

$14,500

$14,500

Step 3: Multi-step income statement

Particular

Amount $

Amount $

Sales

$227,100

Less: Sales discount

(1,000)

Inventory shrinkage

(2,700)

Less: Sales return and allowance

(5,000)

Net sales

218,400

Less: Cost of goods sold

(75,800)

Gross profit

142,600

Less: Expenses

Depreciation expenses – store equipment

(3,000)

Salaries expenses

(63,000)

Insurance expense

(2,800)

Rent expense

(26,000)

Store supplies expense

(6,000)

Advertising expense

(17,800)

Net income

$24,000

Step 4: Single-step income statement

Particular

Amount $

Amount $

Sales

$227,100

Less: expenses/contra-revenue

Sales discount

(1,000)

Inventory shrinkage

(2,700)

Sales return and allowance

(5,000)

Cost of goods sold

(75,800)

Depreciation expenses – store equipment

(3,000)

Salaries expenses

(63,000)

Insurance expense

(2,800)

Rent expense

(26,000)

Store supplies expense

(6,000)

Advertising expense

(17,800)

Net income

$24,000

Step 5: Financial ratios

Current ratio:

Acid test ratio:

Gross margin ratio:

Most popular questions for Business-studies Textbooks

Prepare journal entries to record the following merchandising transactions of Menards, which applies the perpetual inventory system and gross method. (Hint: It will help to identify each receivable and payable; for example, record the purchase on July 3 in Accounts Payable—OLB.)

July 3 Purchased merchandise from OLB Corp. for $15,000 under credit terms of 1∕10, n∕30, FOB destination, invoice dated July 3.

7 Sold merchandise to Brill Co. for $11,500 under credit terms of 2∕10, n∕60, FOB destination, invoice dated July 7. The merchandise had cost $7,750.

10 Purchased merchandise from Rupert Co. for $14,200 under credit terms of 1∕10, n∕45, FOB shipping point, invoice dated July 10.

11 Paid $300 cash for shipping charges related to the July 7 sale to Brill Co.

12 Brill returned merchandise from the July 7 sale that had cost Menards $1,450 and been sold for $2,000. The merchandise was restored to inventory.

14 After negotiations with Rupert Co. concerning problems with the merchandise purchased on July 10, Menards received a credit memorandum from Rupert granting a price reduction of $1,200.

15 At OLB’s request, Menards paid $200 cash for freight charges on the July 3 purchase, reducing the amount owed to OLB.

17 Received balance due from Brill Co. for the July 7 sale less the return on July 12.

20 Paid the amount due Rupert Co. for the July 10 purchase less the price reduction granted on July 14.

21 Sold merchandise to Brown for $11,000 under credit terms of 1∕10, n∕30, FOB shipping point, invoice dated July 21. The merchandise had cost $7,000.

24 Brown requested a price reduction on the July 21 sale because the merchandise did not meet specifications. Menards sent Brown a credit memorandum for $1,000 toward the $11,000 invoice to resolve the issue.

30 Received Brown’s cash payment for the amount due from the July 21 sale less the price allowance from July 24.

31 Paid OLB Corp. the amount due from the July 3 purchase.

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