Problem 45A Preparing adjusting entries and income statement

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.  
  

  
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 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

Solution

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)