Chapter 5, Problem 3GLP

To determine

Concept Introduction:

Adjusting Entries:

An adjusting entry is a journal entry which intends to record the expenses and revenue occurred during the accounting period.

Requirement 1:

1. Preparation of adjusting entries as January 31.

Answer to Problem 3GLP

Date	Accounts	Debit	Credit
Jan. 31
a)	Store Supplies Expense	$4,050
	Store Supplies		$4,050
b)	Insurance Expense	$1,400
	Prepaid Insurance		$1,400
c)	Depreciation Expense − Store Equipment	$1,525
	Accumulated Depreciation − Store Equipment		$1,525
d)	Cost of Goods Sold	$1,600
	Merchandise Inventory		$1,600

Explanation of Solution

Merchandise Inventory

Date	Description	Debit	Credit	Balance
Jan. 31	Balance			$12,500
1(d)	Cost of Goods Sold		$1,600	$10,900

Store Supplies

Date	Description	Debit	Credit	Balance
Jan. 31	Balance			$5,800
1(a)	Store Supplies Expense		$4,050	$1,750

Prepaid Insurance

Date	Description	Debit	Credit	Balance
Jan. 31	Balance			$2,400
1(b)	Insurance Expense		$1,400	$1,000

Accumulated Depreciation − Store Equipment

Date	Description	Debit	Credit	Balance
Jan. 31	Balance			$15,250
1(c)	Depreciation Expense − Store Equipment		$1,525	$16,775

Depreciation Expense - Store Equipment

Date	Description	Debit	Credit	Balance
Jan. 31	Balance			$0
1(c)	Accumulated Depreciation − Store Equipment	$1,525		$1,525

Insurance Expense

Date	Description	Debit	Credit	Balance
Jan. 31	Balance			$0
1(b)	Prepaid Insurance	$1,400		$1,400

Store Supplies Expense

Date	Description	Debit	Credit	Balance
Jan. 31	Balance			$0
1(a)	Store Supplies	$4,050		$4,050

Cost of Goods Sold

Date	Description	Debit	Credit	Balance
Jan. 31	Balance			$38,400
1(d)	Merchandise Inventory	$1,600		$40,000

Adjusted Trial Balance

NELSON COMPANY Adjusted Trial Balance January 31
Accounts	Debit	Credit
Cash	$1,000
Merchandise Inventory	10,900
Store Supplies	1,750
Prepaid Insurance	1,000
Store Equipment	42,900
Accumulated Depreciation - Store Equipment		$16,775
Accounts Payable		10,000
J. Nelson, Capital		32,000
J. Nelson, Withdrawals	2,200
Sales		111,950
Sales Discount	2,000
Sales Return and Allowance	2,200
Cost of Goods Sold	40,000
Depreciation Expense - Store Equipment	1,525
Sales Salaries Expense	17,500
Office Salaries Expense	17,500
Insurance Expense	1,400
Rent Expense − Selling Space	7,500
Rent Expense − Office Space	7,500
Store Supplies Expense	4,050
Advertising Expense	9,800
Totals	$170,725	$170,725

To determine

Concept Introduction:

Multiple Income Statement:

The income statement which classifies the items of revenues and expenses during an accounting period into different categories like gross profit, operating and non-operating revenues and expenses is called a multiple income statement.

Requirement 2:

To prepare:

Prepare a multiple-step income statement for the year ended January 31.

Answer to Problem 3GLP

Multiple-Step Income Statement
Gross Profit	$67,750
Operating Expense:
Selling Expense	40,375
General and Administrative Expense	26,400
Net Income	$975

Explanation of Solution

NELSON COMPANY Multiple-Step Income Statement January 31
Revenue:
Sales		$111,950
Less: Sales Discount	$2,000
Sales Return and Allowance	2,200	4,200
Net Sales		107,750
Cost of Goods Sold		40,000
Gross Profit		67,750
Operating Expense
Selling Expense
Depreciation Expense - Store Equipment	1,525
Sales Salaries Expense	17,500
Advertising Expense	9,800
Store Supplies Expense	4,050
Rent Expense − Selling Space	7,500
Total Selling Expense		40,375
General and Administration Expense

To determine

Concept Introduction:

Single step Income statement:

It is one of the two generally used income statements. In this type the Net Income is found by only one subtraction.

Requirement 3:

To prepare:

Prepare a single-step income statement for the year ended January 31.

Answer to Problem 3GLP

Single-Step Income Statement
Total Expense	$106,775
Net income	$975

Explanation of Solution

3.

NELSON COMPANY Single-Step Income Statement January 31
Revenue:
Net Sales		$107,750
Expenses:
Cost of Goods Sold	40,000
Depreciation Expense - Store Equipment	1,525
Sales Salaries Expense	17,500
Office Salaries Expense	17,500
Insurance Expense	1,400
Rent Expense − Selling Space	7,500
Rent Expense − Office Space	7,500
Office Supplies Expense	4,050
Advertising Expense	9,800
Total Expense		$106,775
Net Income		$975

*Net Sales = Sales − Sales Discounts − Sales Returns and Allowances

= $111,950 - $2,000 - $2,200

= $107,750

To determine

Concept Introduction:

Current ratio:

A ratio that measures the company's ability to pay off short and long term obligations are known as current ratio.

Acid test ratio:

A ratio that measures the company's ability to cover current liabilities using the short term assets is known as acid test ratio.

Gross margin ratio:

A profitability ratio that measures how company sells its inventory is known as gross margin ratio.

Requirement 4:

To Compute:

Computation of current ratio, acid-test ratio and gross margin ratio

Answer to Problem 3GLP

Ratios
Current Ratio	1.47
Acid-Test Ratio	0.28
Gross Margin Ratio	62.88%

Explanation of Solution

Current Ratio = Current Asset / Current Liabilities

  $\begin{array}{l}=\$14,650/\$10,000\hfill \\ =1.47\hfill \end{array}$

*Current Asset = Cash + Merchandise Inventory + Store Supplies + Prepaid Insurance

  $\begin{array}{l}=\$1,000+\$10,900+\$1,750+\$1,000\hfill \\ =\$14,650\hfill \end{array}$

Acid-Test Ratio = Quick Asset / Current Liabilities

  $\begin{array}{l}=\$2,750/\$10,000\hfill \\ =0.28\hfill \end{array}$

*Quick Asset = Current Assets − Merchandise Inventory − Prepaid Insurance

  $\begin{array}{l}=\$14,650-\$10,900-\$1,000\hfill \\ =\$2,750\hfill \end{array}$

Gross Margin Ratio = Gross Profit / Net Sales

  $\begin{array}{l}=\$67,750/\$107,750\hfill \\ =62.88\%\hfill \end{array}$