Problem 4-5A Preparing adjusting entries and income statements; computing gross
ID: 2399147 • Letter: P
Question
Problem 4-5A Preparing adjusting entries and income statements; computing gross margin, acid-test, and current ratios LO A1, A2, P3, P4
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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 $1,750.
Expired insurance, an administrative expense, for the fiscal year is $1,400.
Depreciation expense on store equipment, a selling expense, is $1,525 for the fiscal year.
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 4
4. Compute the current ratio, acid-test ratio, and gross margin ratio as of January 31, 2017. (Round your answers to 2 decimal places.)
NELSON COMPANYUnadjusted 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
Explanation / Answer
Adjusting Journal Entries
Date
General journal
Debit
Credit
31-Jan
Supplies Expenses
$ 4,050.00
Store Supplies
$ 4,050.00
(supplies consumed)
31-Jan
Insurance Expense
$ 1,400.00
Advance Insurance
$ 1,400.00
Insurance expense booked)
31-Jan
Depreciation expense -Store Equipment
$ 1,525.00
Accumulated Depreciation -Store Equipment
$ 1,525.00
(depreciation for the year)
31-Jan
Inventory shrinkage Expense
$ 1,600.00
Merchandise Inventory
$ 1,600.00
(inventory shrinkage expenses charged)
NELSON COMPANY
Income Statement
for the year ended 31 January 2017
Sales
$ 111,950.00
Less: Sales Discount
$ 2,000.00
Less: sales Returns and allowances
$ 2,200.00
Net Sales
$ 107,750.00
Cost of Goods Sold
$ 38,400.00
Gross profit
$ 69,350.00
Operating Expenses
Depreciation expense—Store equipment
$ 1,525.00
Salaries expense
$ 35,000.00
Invenory shrinkage Expense
$ 1,600.00
Insurance expense
$ 1,400.00
Rent expense
$ 15,000.00
Store supplies expense
$ 4,050.00
Advertising expense
$ 9,800.00
Total Operating expenses
$ 68,375.00
Net Income
$ 975.00
Current ratio
Current assets/Current Liabilities
Current ratio
(14650/10000)
Current ratio
1.47 to 1
Gross Margin Ratio
(Gross Profit/Sales*100)
Gross Margin Ratio
(69350/107750*100)
Gross Margin Ratio
64%
Acid Test ratio
(Cash +Accounts Receivables+ Short term Investments)/Current Liabilities
Acid Test ratio
(1000)/10000
Acid Test ratio
0.1 to 1
NELSON COMPANY
Balance Sheet
As at 31 January 2017
Assets
Current Assets
Cash
$ 1,000.00
Merchandise inventory
$ 10,900.00
Store supplies
$ 1,750.00
Prepaid insurance
$ 1,000.00
Total Current assets
$ 14,650.00
Other assets
Store equipment
$ 42,900.00
Less: Accumulated Depreciation
$ 16,775.00
Net Store equipment
$ 26,125.00
Total Assets
$ 40,775.00
Liabilities
Current liabilities
Accounts Payable
$ 10,000.00
Total Current liabilities
$ 10,000.00
Shareholder's equity
Common Stock
$ 5,000.00
Retained earnings
$ 25,775.00
Total Shareholder's Equity
$ 30,775.00
Total Liabilities and Shareholder's equity
$ 40,775.00
Adjusting Journal Entries
Date
General journal
Debit
Credit
31-Jan
Supplies Expenses
$ 4,050.00
Store Supplies
$ 4,050.00
(supplies consumed)
31-Jan
Insurance Expense
$ 1,400.00
Advance Insurance
$ 1,400.00
Insurance expense booked)
31-Jan
Depreciation expense -Store Equipment
$ 1,525.00
Accumulated Depreciation -Store Equipment
$ 1,525.00
(depreciation for the year)
31-Jan
Inventory shrinkage Expense
$ 1,600.00
Merchandise Inventory
$ 1,600.00
(inventory shrinkage expenses charged)
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