Question

Problem 4-5A Preparing adjusting entries and income statements; computing gross margin, acid-test, and current ratios LO A1, A2, P3, P4

[The following information applies to the questions displayed below.]
  
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
Accounts payable					10,000
Common stock					5,000
Retained earnings					27,000
Dividends		2,200
Sales					111,950
Sales discounts		2,000
Sales returns and allowances		2,200
Cost of goods sold		38,400
Depreciation expense—Store equipment		0
Salaries expense		35,000
Insurance expense		0
Rent expense		15,000
Store supplies expense		0
Advertising expense		9,800
Totals	$	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.
  
Additional Information:

1. Store supplies still available at fiscal year-end amount to $1,750.
2. Expired insurance, an administrative expense, for the fiscal year is $1,400.
3. Depreciation expense on store equipment, a selling expense, is $1,525 for the fiscal year.
4. 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.

Problem 4-5A Part 1, 2 and 3

Required:

1. Using the above information prepare adjusting journal entries:
2. Prepare a multiple-step income statement for fiscal year 2017.
3. Prepare a single-step income statement for fiscal year 2017.

Answer 1

Solution:

No.of Transaction	Date	General Journal	Debit ($)	Credit ($)
1.	Jan.31	Store supplies expenses ($5,800 - $1,750)	4,050
		Store supplies		4,050
		(To record store supplies)
2.	Jan.31	Insurance expenses	1400
		Prepaid insurance		1400
		(To record an administrative expenses)
3.	Jan.31	Depreciation expenses - Store equipment	1,525
		Accumulated depreciation - Store equipment		1,525
		(To record the depreciation expense on store equipment)
4.	Jan.31	Cost of goods sold($12,500 - $10,900)	1,600
		Merchandise inventory		1,600
		(To record the cost of goods sold)

2.)Multiple Income Statement

Nelson Company

Income Statement

For the Year Ended January 31,2017

Sales		$111,950
Less: Sales discount	$2,000
Less: Sales returns and allowances	$2,200	$4,200
Net Sales		$107,750
Cost of goods sold		$40,000
Gross Profit		$67,750
Expenses:
Selling expenses:
Depreciation expense - Store equipment	$1,525
Sales salaries expenses	$17,500
Rent expenses - Selling space	$7,500
Store supplies expenses	$4,050
Advertising expenses	$9,800
Total selling expenses	$40,375
General and administrative expenses:
Insurance expenses	$1,400
Office salaries expenses	$17,500
Rent expenses - Office space	$7,500
Total general and administrative expenses	$26,400
Total expenses		$66,775
Net income		$975

3.) Single Step Income Statement:

Nelson Company

Income Statement

For the Year Ended January 31, 2017

Net Sales		$107,750
Expenses:
Cost of goods sold	$40,000
Selling expenses	$40,375
General and administrative expenses	$26,400
Total expenses		$106,775
Net Income		$975

Current assets:
Cash	$1,000
Merchandise inventory($12,500 - $1,600)	$10,900
Store supplies	$1,750
Prepaid insurance ($2,400 - $1,400)	$1,000
Total current assets	$14,650
Current liabilities	$10,000
Current ratio ($14,650/10,000)	1.465 or 1.47

Quick assets (Cash)	$1,000
Current liabilities	$10,000
Acid - test ratio ($1,000/ $10,000)	0.10

Net Sales	$107,750
Cost of goods sold	$40,000
Gross margin	$67,750
Gross margin ratio ($67,750/$10,750)	0.628 or 0.63