Question

The following unadjusted trial balance is prepared at fiscal year-end for Nelson Company.

NELSON COMPANY Unadjusted Trial Balance January 31, 2016
	Debit			Credit
Cash	$	24,250
Merchandise inventory		13,000
Store supplies		5,200
Prepaid insurance		2,400
Store equipment		42,600
Accumulated depreciation—Store equipment				$	19,650
Accounts payable					12,000
Common stock					18,000
Retained earnings					20,000
Dividends		2,200
Sales					115,600
Sales discounts		1,800
Sales returns and allowances		2,100
Cost of goods sold		38,000
Depreciation expense—Store equipment		0
Salaries expense		28,500
Insurance expense		0
Rent expense		16,000
Store supplies expense		0
Advertising expense		9,200
Totals	$	185,250		$	185,250

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 $1,950.

Expired insurance, an administrative expense, for the fiscal year is $1,700.

Depreciation expense on store equipment, a selling expense, is $1,625 for the fiscal year.

To estimate shrinkage, a physical count of ending merchandise inventory is taken. It shows $10,500 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 fiscal year 2016.The following unadjusted trial balance is prepared at fiscal year-end for Nelson Company.

3. Prepare a single-step income statement for fiscal year 2016.

4. Compute the current ratio, acid-test ratio, and gross margin ratio as of January 31, 2016. (Round your answers to 2 decimal places.)

Answer 1

Part 1 - Journal Entry Worksheet

Date	Accounts title and Explanation	Debit	Credit
January 31	Store Supplies Expenses ($5200 - $1950)	$3250
	Store Supplies		$3250
	(Consumption of supplies during the year charged to expenses)
January 31	Insurance Expenses	$1700
	Prepaid Insurance Expenses		$1700
	(Insurance for current period paid in earlier years is now expired)
January 31	Depreciation Expenses - Store Equipment	$1625
	Accumulated Depreciation - Store Equipment		$1625
	(Depreciation charged on Equipment)
January 31	Cost of Goods sold ($13000 - $10500)	$2500
	Merchandise Inventory		$2500
	(Physical Inventory difference adjusted)

Part 2 - Multiple Step Income Statement

Nelson Company

Multiple Step Income Statement

For the year Ended January 31, 2016

Particulars			Amount
Sales		$115600
Less : Sales Discounts		($1800)
Less : Sales return and allowances		($2100)
Net Sales			$111700
Less : Cost of Goods sold ($38000 + $2500)			($40500)
Gross Profit (A)			$71200
Less : Expenses
Selling Expenses
Depreciation expenses - store equipment	$1625
Sales salary expenses ($28500/2)	$14250
Rent Expenses ($16000/2)	$8000
Store supplies expenses	$3250
Advertising expenses	$9200
Total Selling expenses		$36325
Administrative Expenses
Salary expenses	$14250
Rent Expenses	$8000
Insurance Expenses	$1700
Total Administrative Expenses		$23950
Total Expenses ($23950+$36325)			$60275
Net Income			$10925

Part 3 - Single step Income Statement

Nelson company

Single Step Income Statement

For the year ended january 31, 2016

Particulars		Amount
Net Sales		$111700
Less : Expenses
Cost of Goods Sold	$40500
Selling expenses	$36325
Administrative expenses	$23950
Total Expenses		$100775
Net Income		$10925

Part 4 - Calculation of Ratios

A) Current Ratio = Current Asset - Current Liabilities

Particulars
Current Assets
Cash	$24250
Inventory ($13000 - $2500)	$10500
Prepaid Expenses ($2400 - $1700)	$700
Store Supplies	$1950
Total Current Assets (A)		$37400
Total Current Liabilities (Accounts Payable) (B)		$12000
Current Ratio (A/B)		3.12

B) Quick Ratio = [Current Assets - Prepaid Expenses - Inventory] - [Current Liabilities]

Quick Asset = $24250 (only cash)

Quick Liabilities = $12000

Quick Ratio = ($24250/$12000) = 2.02

C) Gross Margin Ratio

Gross Margin Ratio = (Gross Profit/Net sales)*100

Gross Margin Ratio = ($71200/$111700)*100 = 63.74%