Chapter 5, Problem 5APSA

To determine

Concept Introduction:

Adjusting entries

Adjusting entries are prepared to complete the financial statement of the company and to reflect the accrual method of accounting. Adjusting entries are prepared before issuance of financial statement.

To prepare:

To prepare adjusting journal entry.

Answer to Problem 5APSA

Date	Accounts titles and Explanation	Debit ($)	Credit ($)
Jan.31	Store supplies expense	4,050
	Store supplies		4,050
	(To record the store supplies available at year end)
Jan.31	Insurance Expense	1,400
	Prepaid insurance		1,400
	(To record expired insurance)
Jan.31	Depreciation expense - store equipment	1,525
	Accumulated depreciation - store equipment		1,525
	(To record the depreciation expense on store-Equipment)
Jan.31	Cost of goods sold	1,600
	Merchandise inventory		1,600
	(To record the cost of goods sold of inventory)

Explanation of Solution

Journal entries are explained as follows-

1. In this entry, store supplies are available at the end. So to adjust this, store supplies are recorded as an expense and debited in the entry. Store supplies are current assets as they are decreasing so it gets credited.

  $\begin{array}{l}Storesupplies=Totalbalance-Availablebalanceattheend\hfill \\ Storesupplies=\$5,800-\$1,750\hfill \\ Storesupplies=\$4,050\hfill \end{array}$

1. In this entry, Expired insurance is recorded. Insurance is an expense for the company so it is debited and prepaid insurance are current assets as they are decreasing so it gets credited.
2. In this entry, Depreciation expense is recorded. So it is debited. Assets gets reduced with such amount so accumulated depreciation is credited.
3. In this entry cost of goods sold are recorded. So inventory will get reduced with such amount, so it is credited.

  $\begin{array}{l}Amountrecorded=Merchandiseinventory–Availablebalance\hfill \\ Amountrecorded=12,500-10,900\hfill \\ Amountrecorded=1,600\hfill \end{array}$

Conclusion:

Thus, the adjusting journal entries are prepared.

To determine

Concept Introduction:

Multiple-step Income statement

Multiple step income statement is one of the format of preparing income statement. Another format of preparing income statement is single step income statement.

Multiple step income statement provides more information than a single step income statement. It involves more than one deduction.

To prepare:

To prepare multiple step income statement.

Answer to Problem 5APSA

Multiple step Income statement
Nelson Co.
Particulars	Amount ($)	Amount ($)
Sales revenue:
Sales	111,950
Less: Sales discount	2,000
Less: Sales returns and allowances	2,200
Net sales		107,750
Less: Cost of goods sold (38,400+1,600)		40,000
Gross profit		67,750
Operating Expenses
Selling expenses:
Sales staff salaries	17,500
Advertising expense	9,800
Rent expense- selling space	7,500
Store supplies expense	4,050
Depreciation Expense- store equipment	1,525	40,375
General and administrative expense:
Office salaries expense	17,500
Rent expense-Office space	7,500
Insurance expense	1,400	26,400
Total Operating expenses		66,775
Net income		975

Explanation of Solution

Net Income is calculated as follows-
  $Netincome=Grossprofit-Totaloperatingexpenses$

Gross profit is calculated as follows

  $\begin{array}{l}Grossprofit=Netsales–Costofgoodssold\hfill \\ Grossprofit=\$107,750-\$40,000\hfill \\ Grossprofit=\$67,750\hfill \end{array}$

  $\begin{array}{l}Netsales=Salesrevenue-Salesdiscounts-Salesreturnsandallowance\\ \begin{array}{l}Netsales=\$111,950-\$2,000-\$2,200\hfill \\ Netsales=\$107,750\hfill \end{array}\end{array}$

Total Operating expenses is calculated as follows

  $\begin{array}{l}TotalOperatingexpenses=Sellingexpenses+Generalandadministrativeexpenses\hfill \\ \begin{array}{l}TotalOperatingexpenses=(Salesstaffsalaries+Advertisingexpense+Rentexpense-sellingspace\\ +Storesuppliesexpense+DepreciationExpense-storeequipment)\\ +(Officesalariesexpense+Rentexpense-Officespace+Insuranceexpense)\end{array}\hfill \\ TotalOperatingexpenses=\left(17,500+9,800+7,500+4,050+1,525\right)+\left(17,500+7,500+1,400\right)\hfill \\ TotalOperatingexpenses=40,375+26,400\hfill \\ TotalOperatingexpenses=66,775\hfill \end{array}$

  $\begin{array}{l}Netincome=Grossprofit-TotalOperatingexpenses\hfill \\ Netincome=67,750-66,775\hfill \\ Netincome=\$975\hfill \end{array}$

Conclusion:

Thus, multiple-step income statement is prepared.

To determine

Concept Introduction:

Single-step Income statement

Single-step income statement is one of the format of preparing income statement. Another format of preparing income statement is multiple- step income statement.

In single step income statement, all the expenses included cost of goods sold is recorded in one column. Expenses are not divided into sub-categories.

To prepare:

To prepare single step income statement.

Answer to Problem 5APSA

Single step Income statement
Nelson Co.
Particulars	Amount ($)	Amount ($)
Sales revenue:
Sales	111,950
Less: Sales discount	2,000
Less: Sales returns and allowances	2,200
Net sales		107,750
Less: Expenses:
Cost of goods sold	40,000
Sales staff salaries	17,500
Advertising expense	9,800
Rent expense- selling space	7,500
Store supplies expense	4,050
Depreciation Expense- store equipment	1,525
Office salaries expense	17,500
Rent expense-Office space	7,500
Insurance expense	1,400
Total expenses		106,775
Net income		975

Explanation of Solution

Net Income is calculated as follows

  $Netincome=Netsales-Totalexpenses$

Net sales is calculated as follows-

  $\begin{array}{l}Netsales=Salesrevenue-Salesdiscounts-Salesreturnsandallowance\\ \begin{array}{l}Netsales=\$111,950-\$2,000-\$2,200\hfill \\ Netsales=\$107,750\hfill \end{array}\end{array}$

Total expenses is calculated as follows

  $\begin{array}{l}\hfill \\ \begin{array}{l}Totalexpenses=Costofgoodssold+Salesstaffsalaries+Advertisingexpense+\\ Rentexpense-sellingspace+Storesuppliesexpense+DepreciationExpense-storeequipment\\ +Officesalariesexpense+Rentexpense-Officespace+Insuranceexpense)\end{array}\hfill \\ Totalexpenses=40,000+\left(17,500+9,800+7,500+4,050+1,525\right)+\left(17,500+7,500+1,400\right)\hfill \\ Totalexpenses=106,775\hfill \\ \hfill \end{array}$

  $\begin{array}{l}Netincome=Netsales-Totalexpenses\hfill \\ Netincome=107,750-106,775\hfill \\ Netincome=\$975\hfill \end{array}$

Conclusion:

Thus, single-step income statement is prepared.

To determine

Concept Introduction:

Current ratio

Current ratio is a ratio which helps to measure the ability of company to pay the obligations of the company. It is calcuated by using following formula

  $Currentratio=Currentassets/Currentliabilities$

Acid-test ratio

It is a ratio which measures the ability of company to use its short term cash to repay the liabilities immediately. It is calcuated by using following formula

  $Acid-testratio=Quickassets/Currentliabilities$

Gross margin ratio

Gross margin ratio assesses the profitability of the company by stating gross margin as a percenatge of sales. It is calculated by usimg following formula-

  $Grossmarginratio=\frac{Grossmargin}{Netsales}*100$

To Calculate:

To compute current ratio, Acid test ratio, Gross margin ratio.

Answer to Problem 5APSA

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

  $\begin{array}{l}Acidtestratio=QuickAssets/CurrentLiabilities\hfill \\ Acidtestratio=1,000/10,000\hfill \\ Acidtestratio=0.1\hfill \end{array}$

  $\begin{array}{l}Grossmarginratio=\frac{Grossmargin}{Netsales}*100\hfill \\ Grossmarginratio=\frac{67,750}{107,750}*100\hfill \\ Grossmarginratio=62.88\%\hfill \\ \hfill \end{array}$

Explanation of Solution

1. Current ratio-

  $Currentratio=Currentassets/Currentliabilities$

  $\begin{array}{l}Currentassets=Cash+Merchandiseinventory+Storesupplies+Prepaidinsurance\hfill \\ Currentassets=1,000+10,900+1,750+1,000\hfill \\ Currentassets=14,650\hfill \end{array}$

  $\begin{array}{l}Currentliabilities=Accountspayable\hfill \\ Currentliabilities=10,000\hfill \end{array}$

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

2. Acid-test ratio-

  $Acid-testratio=Quickassets/Currentliabilities$

  $\begin{array}{l}Quickassets=Cash\hfill \\ Quickassets=1,000\hfill \end{array}$

  $\begin{array}{l}Currentliabilities=Accountspayable\hfill \\ Currentliabilities=10,000\hfill \end{array}$

  $\begin{array}{l}Acidtestratio=QuickAssets/CurrentLiabilities\hfill \\ Acidtestratio=1,000/10,000\hfill \\ Acidtestratio=0.1\hfill \end{array}$

3. Gross-margin ratio-

  $Grossmarginratio=\frac{Grossmargin}{Netsales}*100$

Gross margin = 67,750 (Calculated in part 2)

Net sales = 107,750 (Calculated in part 2)

  $\begin{array}{l}Grossmarginratio=\frac{Grossmargin}{Netsales}*100\hfill \\ Grossmarginratio=\frac{67,750}{107,750}*100\hfill \\ Grossmarginratio=62.88\%\hfill \\ \hfill \end{array}$

Conclusion:

Thus, ratios are calculated.