
Concept explainers
1.
To prepare:
1.

Explanation of Solution
Physical count of Store supplies at the year end shows $1,750 still available but store supplies listed shows $5,800.
Date | Account Title and Explanation | Post ref | Debit ($) | Credit ($) |
Jan 31 | Supplies expense | 4,050 | ||
Store supplies | 4,050 | |||
(To record supplies consumed) |
- Supplies expense account is an expense account. Since Supplies expense is increased, expense is to be increased. So, debit the Supplies expense account.
- Store supplies account is an asset account. Since inventory is shrinked, so it is to be reduced. Therefore, Store supplies account is to be credited.
Working notes:
Computation of inventory shrinkage,
Prepaid selling expenses worth $1,400 have expired:
Date | Account Title and Explanation | Post ref | Debit ($) | Credit ($) |
Jan 31 | Insurance expense | 1,400 | ||
Prepaid insurance expense | 1,400 | |||
(To record expired prepaid insurance expense) |
- Insurance expense is an expense account. Since insurance expense is increased, expense is to be increased. So, debit the insurance expense account.
- Prepaid insurance expense is an asset account. Since prepaid insurance expense have expired resulting a decrease in asset, so asset is to be decreased. Therefore prepaid insurance expense account is credited.
Date | Account Title and Explanation | Post ref | Debit ($) | Credit ($) |
Jan 31 | Depreciation expense | 1,525 | ||
Store equipment | 1,525 | |||
(To record depreciation expense) |
- Depreciation expense is an expense account. Since depreciation expense is to be recorded, expense is to be increased. So, debit the depreciation expense account.
- Store equipment is an asset account. Since, depreciation expense is to be recorded resulting a decrease in asset, so asset is to be decreased. Therefore Store equipment account is credited.
Physical count of merchandise inventory at the year end shows $10,900 still available but merchandise inventory listed shows $12,500.
Date | Account Title and Explanation | Post ref | Debit ($) | Credit ($) |
Jan 31 | Cost of goods sold | 1,600 | ||
Merchandise inventory | 1,600 | |||
(To record inventory shrinkage cost) |
- Cost of goods sold account is an expense account. Since goods are shrinked, expense is to be increased. Therefore, cost of goods sold account is debited.
- Merchandise inventory account is an asset account. Since inventory is shrinked, so it is to be reduced. Therefore, merchandise inventory account is to be credited.
Working notes:
Computation of inventory shrinkage,
2.
To prepare: Multi step income statement.
2.

Explanation of Solution
Multi Step Income Statement
Particulars | Amount ($) | Amount ($) |
Sales Revenue | 111,950 | |
Less: Sales Returns and Allowances | (2,200) | |
Sales discount | (2,000) | (4,200) |
Net Sales | 107,750 | |
Less: Cost of Goods Sold | (40,000) | |
Gross Profit | 67,750 | |
Less: Selling expenses | ||
Advertising expense | (9,800) | (9,800) |
57,950 | ||
Less: General and admin Expenses | ||
Store supply expense | (4,050) | |
Rent expense | (15,000) | |
Insurance expense | (1,400) | |
Depreciation | (1,525) | |
Salaries | (35,000) | (56,975) |
Net income | 975 |
Hence, net income of Company N is $975.
3.
To prepare: Single step income statement.
3.

Explanation of Solution
Single Step Income Statement
Particulars | Amount ($) | Amount ($) |
Net Sales | 107,750 | |
Less: Expenses | ||
Cost of goods sold | (40,000) | |
Selling expenses | (9,800) | |
General and admin Expenses | (56,975) | (106,775) |
Net Sales | 975 |
Hence, net income of Company N is $975.
4.
To Compute: Current and acid test ratio and gross margin ratio.
4.

Explanation of Solution
Gross profit is $67,750. (From part 2)
Net sales is $107,750. (From part 2)
Formula to compute gross margin ratio,
Substitute $67,750 for gross profit and $107,750 for net sales.
Given,
Cash is $1,000.
Merchandise inventory is $10,900.
Store supplies are $1,750.
Prepaid asset is $1,000.
Current liabilities are $10,000.
Formula to compute
Substitute $14,650 for current assets and $10,000 for current liabilities.
Working notes:
Computation of current assets,
Calculated,
Current assets are $14,650.
Merchandise inventory is $10,900.
Store supplies are $1,750.
Prepaid asset is $1,000.
Current liabilities are $10,000.
Formula to compute acid test ratio,
Substitute $14,650 for current assets, $12,650
Hence, gross margin ratio of Company N is 62.87%, Current ratio is 1.47, acid test ratio is 0.1.
General ledger:
Date | Account Title and Explanation | Post ref | Debit ($) | Credit ($) | Balance ($) |
Jan 31 | Store supply | 4,050 | 4,050 |
Hence, the ending balance is $4,050.
Date | Account Title and Explanation | Post ref | Debit ($) | Credit ($) | Balance ($) |
Feb 1 | Opening balance | 5,800 | 5,800 | ||
Jan 31 | Supply expense | 4,050 | 1,750 |
Hence, the ending balance is $1,750.
Date | Account Title and Explanation | Post ref | Debit ($) | Credit ($) | Balance ($) |
Jan 31 | Prepaid insurance expense | 1,400 | 1,400 |
Hence, the ending balance is $1,400.
Date | Account Title and Explanation | Post ref | Debit ($) | Credit ($) | Balance ($) |
Feb 1 | Opening balance | 2,400 | 2,400 | ||
Jan 31 | Insurance expense | 1,400 | 1,000 |
Hence, the ending balance is $1,000.
Date | Account Title and Explanation | Post ref | Debit ($) | Credit ($) | Balance ($) |
Jan 31 | Store equipment | 1,525 | 1,525 |
Hence, the ending balance is $1,525.
Date | Account Title and Explanation | Post ref | Debit ($) | Credit ($) | Balance ($) |
Feb 1 | Opening balance | 42,900 | 42,900 | ||
Jan 31 | Depreciation expense | 1,525 | 41,375 |
Hence, the ending balance is $41,375.
Date | Account Title and Explanation | Post ref | Debit ($) | Credit ($) | Balance ($) |
Jan 31 | Merchandise inventory | 1,600 | 1,600 |
Hence, the ending balance is $1,600.
Date | Account Title and Explanation | Post ref | Debit ($) | Credit ($) | Balance ($) |
Feb 1 | Opening balance | 12,500 | 12,500 | ||
Jan 31 | Cost of goods sold | 1,600 | 10,900 |
Hence, the ending balance is $10,900.
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