Problem 5-5A Preparing adjusting entries and income statements; computing gross

Question

Problem 5-5A 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.

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:

Store supplies still available at fiscal year-end amount to $2,750.

Expired insurance, an administrative expense, for the fiscal year is $1,600.

Depreciation expense on store equipment, a selling expense, is $1,575 for the fiscal year.

To estimate shrinkage, a physical count of ending merchandise inventory is taken. It shows $10,300 of inventory is still available at fiscal year-end.

NELSON COMPANY
Unadjusted Trial Balance
January 31, 2017 Debit Credit Cash $ 3,000 Merchandise inventory 14,000 Store supplies 5,700 Prepaid insurance 2,300 Store equipment 42,700 Accumulated depreciation—Store equipment $ 17,700 Accounts payable 12,000 J. Nelson, Capital 19,000 J. Nelson, Withdrawals 2,250 Sales 115,550 Sales discounts 1,950 Sales returns and allowances 2,150 Cost of goods sold 38,000 Depreciation expense—Store equipment 0 Salaries expense 26,900 Insurance expense 0 Rent expense 16,000 Store supplies expense 0 Advertising expense 9,300 Totals $ 164,250 $ 164,250

Explanation / Answer

Adjusting entries: S.no. Accounts title and explanations Debit $ Credit $ a. Store supplies expenses Dr. 2950     Store supplies 2950 b. Insurance expense Dr. 1600     Prepaid insurance 1600 c. Depreciation expense-Store equipment Dr. 1575       Accumulated depreciation-Store Equipment 1575 d. Cost of goods sold Dr. 3700      Merchandise inventory 3700 Income Statement: Sales revenue 115550 Less: sales discount 1950 Less: sales returns and allowance 2150 Net sales revenue 111450 Less: Cost of goods sold (38000+3700) 41700 Gross Margin 69750 Less: Operating expenses Selling expenses: Depreciation 1575 Store supplies expense 2950 Salaries expense (26900/2) 13450 Rent expenses(16000/2) 8000 Advertisement expense 9300 35275 Admin expenses: Salaries expenses (26900/2) 13450 Rent expenses (16000/2) 8000 Insurance expense 1600 23050 Net Income 11425 Gross Margin: Gross Margin / Sales revenues *100 4 69750 / 111450 *100 = 62.58% Current Ratio: Current assets (3000+10300+2750+700) 16750 Divide: Current Liabilities 12000 Current ratio 1.396 Acid Test ratio: Quick assets (only cash) 3000 Divide: Current liabilities 12000 Acid Test ratio: 0.25

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