Question

Problem 5-5A 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.

NELSON COMPANY Unadjusted Trial Balance January 31, 2017
	Debit			Credit
Cash	$	3,000
Merchandise inventory		14,000
Store supplies		5,700
Prepaid insurance		2,300
Store equipment		42,700
Accumulated depreciation—Store equipment				$	17,700
Accounts payable					12,000
J. Nelson, Capital					19,000
J. Nelson, Withdrawals		2,250
Sales					115,550
Sales discounts		1,950
Sales returns and allowances		2,150
Cost of goods sold		38,000
Depreciation expense—Store equipment		0
Salaries expense		26,900
Insurance expense		0
Rent expense		16,000
Store supplies expense		0
Advertising expense		9,300
Totals	$	164,250		$	164,250

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 $2,750.

Expired insurance, an administrative expense, for the fiscal year is $1,600.

Depreciation expense on store equipment, a selling expense, is $1,575 for the fiscal year.

To estimate shrinkage, a physical count of ending merchandise inventory is taken. It shows $10,300 of inventory is still available at fiscal year-end.

Answer 1

Adjusting entries:
S.no.	Accounts title and explanations				Debit $	Credit $
a.	Store supplies expenses Dr.				2950
	Store supplies					2950
b.	Insurance expense Dr.				1600
	Prepaid insurance					1600
c.	Depreciation expense-Store equipment Dr.				1575
	Accumulated depreciation-Store Equipment					1575
d.	Cost of goods sold Dr.				3700
	Merchandise inventory					3700
Income Statement:
Sales revenue			115550
Less: sales discount			1950
Less: sales returns and allowance			2150
Net sales revenue				111450
Less: Cost of goods sold (38000+3700)				41700
Gross Margin				69750
Less: Operating expenses
Selling expenses:
Depreciation			1575
Store supplies expense			2950
Salaries expense (26900/2)			13450
Rent expenses(16000/2)			8000
Advertisement expense			9300	35275
Admin expenses:
Salaries expenses (26900/2)			13450
Rent expenses (16000/2)			8000
Insurance expense			1600	23050
Net Income				11425
Gross Margin: Gross Margin / Sales revenues *100					4
		69750 / 111450 *100 = 62.58%
Current Ratio:
Current assets (3000+10300+2750+700)					16750
Divide: Current Liabilities					12000
Current ratio					1.396
Acid Test ratio:
Quick assets (only cash)					3000
Divide: Current liabilities					12000
Acid Test ratio:					0.25