Chapter 4, Problem 3GLP

1.

To determine

To prepare: Adjusting entries.

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)

Table(1)

• 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,

  $\begin{array}{c}\text{Supplies Used}=\text{Supplies}\text{listed}-\text{Supplies}\text{still}\text{available}\\ =\$5,800-\$1,750\\ =\$4,050\end{array}$

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)

Table(2)

• 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.

Depreciation expense worth $1,525 is to be recorded:

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Jan 31	Depreciation expense		1,525
	Store equipment			1,525
	(To record depreciation expense)

Table(3)

• 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)

Table(4)

• 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,

  $\begin{array}{c}\text{Inventory}\text{shrinkage}=\text{Inventory}\text{listed}-\text{Inventory}\text{still}\text{available}\\ =\$12,500-\$10,900\\ =\$1,600\end{array}$

2.

To determine

To prepare: Multi step income statement.

Explanation of Solution

Multi Step Income Statement

Company N
Multi step Income Statement
For the Year Ended January 31,
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

Table(5)

Hence, net income of Company N is $975.

3.

To determine

To prepare: Single step income statement.

Explanation of Solution

Single Step Income Statement

Company N
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

Table(6)

Hence, net income of Company N is $975.

4.

To determine

To Compute: Current and acid test ratio and gross margin ratio.

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,

   $\text{Gross}\text{margin}\text{ratio}=\frac{\text{Gross}\text{profit}}{\text{Net}\text{sales}}$

Substitute $67,750 for gross profit and $107,750 for net sales.

   $\begin{array}{c}\text{Gross}\text{margin}\text{ratio}=\frac{\$67,750}{\$107,750}\\ =62.87\%\end{array}$

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 current ratio,

   $\text{Current}\text{ratio}=\frac{\text{Current}\text{assets}}{\text{Current}\text{liabilities}}$

Substitute $14,650 for current assets and $10,000 for current liabilities.
   $\begin{array}{c}\text{Current}\text{ratio}=\frac{\$14,650}{\$10,000}\\ =1.47\end{array}$

Working notes:

Computation of current assets,

   $\begin{array}{c}\text{Current}\text{assets}=\text{Cash}+\text{Merchandise}\text{inventory}+\text{Store}\text{supplies}+\text{Prepaid}\text{assets}\\ =\$1,000+\$10,900+\$1,750+\$1,000\\ =\$14,650\end{array}$

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,

   $\text{Acid}\text{test}\text{ratio}=\frac{\text{Current}\text{assets}-\left(\text{Stock}+\text{Prepaid}\text{expenses}\right)}{\text{Current}\text{liabilities}}$

Substitute $14,650 for current assets, $12,650 $\left(10,900+1,750\right)$ for stock, $1,000 for prepaid expenses and $10,000 for current liabilities.

  $\begin{array}{c}\text{Acid}\text{test}\text{ratio}=\frac{\$14,650-\left(\$12,650+\$1,000\right)}{\$10,000}\\ =0.1\end{array}$

Hence, gross margin ratio of Company N is 62.87%, Current ratio is 1.47, acid test ratio is 0.1.

General ledger:

Supply expense
Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)	Balance ($)
Jan 31	Store supply		4,050		4,050

Table(7)

Hence, the ending balance is $4,050.

Store supply
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

Table(8)

Hence, the ending balance is $1,750.

Insurance expense
Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)	Balance ($)
Jan 31	Prepaid insurance expense		1,400		1,400

Table(9)

Hence, the ending balance is $1,400.

Prepaid insurance expense
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

Table(10)

Hence, the ending balance is $1,000.

Depreciation expense
Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)	Balance ($)
Jan 31	Store equipment		1,525		1,525

Table(11)

Hence, the ending balance is $1,525.

Store equipment
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

Table(12)

Hence, the ending balance is $41,375.

Cost of goods sold
Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)	Balance ($)
Jan 31	Merchandise inventory		1,600		1,600

Table(13)

Hence, the ending balance is $1,600.

Merchandise inventory
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

Table(14)

Hence, the ending balance is $10,900.