Question

The following unadjusted trial balance is prepared at fiscal year-end for Nelson Company. Nelson company uses a perpetual inventory system. It categorizes the following accounts as selling expenses: depreciation expense—store equipment, sales salaries expense, rent expense—selling space, store supplies expense, advertising expense. It categorizes the remaining expenses as general and administrative.

NELSON COMPANY Unadjusted Trial Balance January 31

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 J. Nelson, Capital 32,000

J. Nelson, Withdrawals 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

Sales salaries expense 17,500

Office salaries expense 17,500

Insurance expense 0

Rent expense—Selling space 7,500

Rent expense—Office space 7,500

Store supplies expense 0

Advertising expense 9,800

Totals $ 169,200 $ 169,200

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.

1. Using the above information prepare adjusting journal entries.

2. Prepare a multiple-step income statement for the year ended January 31.

3. Prepare a single-step income statement for the year ended January 31.

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.

4. Compute the current ratio, acid-test ratio, and gross margin ratio as of January 31. (Round your answers to 2 decimal places.)

Answer 1

1. Adjusting journal entries:

In the books of Nelson Company
Date	Account titles	Debit (in $)	Credit (in $)
January 31
	Store Supplies expenses A/c	4,050
	Store supplies A/c		4,050
	(To record usage of supplies)
	Insurance expenses A/c	1,400
	Prepaid insurance A/c		1,400
	(To record expired insurance)
	Depreciation - Store equipment A/c	1,525
	Accumulated Depreciation - Store equipment A/c		1,525
	(To record depreciation on store equipment)
	Cost of Goods Sold A/c	1,600
	Merchandise Inventory A/c		1,600
	(To record loss due to shrinkage)

2. Multiple-step income statement

NELSON COMPANY
Multiple-step Income Statement
for the year ended January 31, xxxx
	figures in $	figures in $
Sales	111,950
Less: Sales discounts	2,000
Less: Sales returns & allowances	2,200
Net Sales		107,750
Cost of Goods sold (38400+1600)		40,000
Gross Profit		67,750
Operating expenses:
Selling expenses
Depreciation on store equipment	1,525
Sales salaries expense	17,500
Rent expenses - Selling	7,500
Store supplies expense	4,050
Advertisement expense	9,800	40,375
Administrative expenses
Office salaries expenses	17,500
Insurance expenses	1,400
Rent expenses - Office	7,500	26,400
Total Operating expenses		66,775
Operating Income		975
Non-operating items		-
Net Income		975

3. Single-step income statement

NELSON COMPANY
Single-step Income Statement
for the year ended January 31, xxxx
	figures in $	figures in $
Revenues & Gains:
Sales	111,950
Less: Sales discounts	2,000
Less: Sales returns & allowances	2,200
Net Sales		107,750
Total revenues & gains		107,750
Expenses & losses:
Cost of Goods sold	40000
Depreciation on store equipment	1525
Sales salaries expense	17500
Rent expenses - Selling	7500
Store supplies expense (5800-1750)	4050
Advertisement expense	9800
Office salaries expenses	17500
Insurance expenses	1400
Rent expenses - Office	7500
Total expenses & losses		106775
Net Income		975

4. Ratios as on January 31

Cash	$1,000
Merchandise inventory (12500-1600)	$10,900
Store supplies (5800-4050)	$1,750
Prepaid insurance (2400-1400)	$1,000
Total Current assets	$14,650
Accounts payable	$10,000
Total Current liabilities	$10,000
Current ratio (Current Assets / Current Liabilities)	1.465
Quick assets (Cash + Short term investments + Accounts receivable)	$1,000
Acid-test Ratio (Quick assets/Current Liabilities)	0.10
Gross profit	$67,750
Net Sales	$107,750
Gross profit margin (Gross profit/Net Sales)	62.88%