Question

Exercise 2-1
For this exercise, use the following fiscal year-end unadjusted trial balance for the Bigelow Company.

Note:   Rent and salary expenses are divided equally between general/administrative and selling activities. Bigelow uses a perpetual inventory system

1.   Prepare a fiscal year 2012 multiple-step income statement. For distinguished performance, prepare both multiple- and single-step income statements.

BIGELOW COMPANY Unadjusted Trial Balance April 30, 2012 (Fiscal year-end)
	Debit	Credit
Cash........................................................................	$2,150
Merchandise inventory..............................................	12,100
Store supplies..........................................................	4,600
Prepaid insurance.....................................................	2,100
Store equipment.......................................................	42,350
Accumulated depreciation—Store equipment.............		$12,000
Accounts payable.....................................................		8,700
Common stock.........................................................		4,500
Retained earnings.....................................................		25,400
Dividends................................................................	1,800
Sales.......................................................................		108,500
Sales discounts........................................................	950
Sales returns and allowances....................................	1,750
Cost of goods sold..................................................	36,300
Depreciation expense—Store equipment...................	0
Salaries expense......................................................	32,500
Insurance expense....................................................	0
Rent expense...........................................................	13,800
Store supplies expense............................................	0
Advertising expense.................................................	8,700	_______
Totals......................................................................	$159,100	$159,100

1.   Prepare adjusting journal entries for the following:
a.   $1,700 of store supplies remaining at the end of the fiscal year.
b.   $1,800 of expired insurance for the fiscal year (administrative expense).
c.   $1,250 depreciation expense on store equipment for the fiscal year (selling expense).
d.   $11,200 of merchandise inventory remaining at the end of the fiscal year (based on a physical count to estimate shrinkage).

1.   Compute the following ratios as of April 30, 2012.
a.   Current ratio.
b.   Acid test ratio.
[Compute the ratios here.]
2.   For distinguished performance, compute the gross margin ratio.
[Compute the ratio here.]

Answer 1

1. Multi Step Income Statement

BIGELOW COMPANY
Income Statement
for the period ending on April 30, 2012
Particulars	Amount	Amount
Sales	108,500
Less: Sales Discounts	(950)
Less: Sales Returns and Allowances	(1,750)
Net Sales		105,800
Cost of Goods Sold		36,300
Gross Profit		69,500
Less: Operating Expenses
Depreciation Expense on Store Equipment	1,250
Salaries Expense	32,500
Insurance Expense	1,800
Rent Expense	13,800
Store Supplies Expense	2,900
Advertising Expense	8,700
Total Operating Expenses		60,950
Operating Income		8,550
Non Operating Income		-
Net Income		8,550

Single Step Income Statement

BIGELOW COMPANY
Income Statement
for the period ending on April 30, 2012
Particulars	Amount
Revenues & Gains
Sales	108,500
Less: Sales Discounts	(950)
Less: Sales Returns and Allowances	(1,750)
Total Revenues & Gains	105,800
Expenses & Losses
Cost of Goods Sold	36,300
Depreciation Expense on Store Equipment	1,250
Salaries Expense	32,500
Insurance Expense	1,800
Rent Expense	13,800
Store Supplies Expense	2,900
Advertising Expense	8,700
Total Expenses & Losses	97,250
Net Income	8,550

Journal Entries

1. Income Statement Dr. 2,900

Store Supplies. Cr. 2,900

2. Insurance Expense. Dr. 1,800

Prepaid Insurance Expense. Cr. 1,800

Income Statement. Dr. 1,800

Insurance Expense. Cr. 1,800

3. Depreciation Expense Dr. 1,250

Accumulated depreciation. Cr. 1,250

Income Statement Dr. 1,250

Depreciation Expense Cr. 1,250

4. No entry

Computation of Ratios

1. Current Ratio = Current Assets / Current Liabilities

= (Cash + Merchandise Inventory + Store Supplies + Prepaid Insurance) / Accounts Payable

= (2,150+11,200+1,700+300) / 8,700

= 1.76:1

2. Acid Test Ration = Liquid Assets / Current Liabilities

= Cash / Accounts Payable

= 2,150 / 8,700

= 0.25:1

Computation of Gross Margin Ratio

Gross Margin Ratio = Gross Profit / Net Sales * 100

= 69,500 / 105,800 * 100

= 65.68%