Chapter 5, Problem 5APSA

Requirement-1a:

To determine

To prepare:

The adjusting journal entry to record the net Store supplies available at fiscal year-end with Nelson Company.

Answer to Problem 5APSA

Solution:

Date	General Journal	Debit ($)	Credit ($)
Jan 31	Store supplies expense	4,050
	Store Supplies		4,050

Explanation of Solution

Store Supplies as on January 31^st, 2015 in unadjusted trial balance: $5,800

Store Supplies available with the company at fiscal year-end: $1,750

Therefore the net stores supplies to be recorded in stores supplies is $5,800-$1,750=$4,050

Conclusion

Hence store supplies expense is debited with $4,050 and store supplies account is credited with the same amount.

Requirement-1b:

To determine

To Prepare:

The journal entry of Nelson Company to record adjusted entry for expired insurance for the fiscal year.

Answer to Problem 5APSA

Solution:

Date	General Journal	Debit ($)	Credit ($)
Jan 31	Insurance Expense	1,400
	Prepaid insurance		1,400

Explanation of Solution

Given the expired insurance, an administrative expense for the fiscal year is $1,400.

Conclusion

Hence the insurance expense is debited with $1,400 and credited with prepaid insurance for expired insurance with $1,400.

Requirement-1c:

To determine

To Prepare:

The journal entry for Nelson Company for adjusted entry to record depreciation expense on store equipment for the fiscal year.

Answer to Problem 5APSA

Solution:

Date	General Journal	Debit ($)	Credit ($)
Jan 31	Depreciation expense (Store Equipment)	1,525
	Accumulated depreciation (Store Equipment)		1,525

Explanation of Solution

Given the depreciation expense on store equipment, a selling expense is $1,525 for the fiscal year.

Conclusion

Hence the depreciation expense for store equipment is debited with $1,525 and credited with accumulated depreciation of $1,525.

Requirement-1d:

To determine

To prepare:

The journal entry to record the adjusting entry for merchandise inventory available with Nelson Company at the fiscal year-end.

Answer to Problem 5APSA

Solution:

Date	General Journal	Debit ($)	Credit ($)
Jan 31	Cost of goods sold	1,600
	Merchandise inventory		1,600

Explanation of Solution

Merchandise inventory as on January 31^st, 2015: $12,500

Merchandise inventory available on fiscal year-end: $10,900

Therefore the net merchandise inventory is $12,500-$10,900=$1,600

Conclusion

Hence the cost of goods sold is debited with $1,600 and credited with merchandise inventory account for $1,600.

Requirement-2:

To determine

To Prepare:

The multi-step income statement for Nelson Company for the year ended January 31^st, 2015 to determine the net income of the company.

Answer to Problem 5APSA

Solution:

Nelson Company Income Statement for the year ended January 31st,2015
Particulars	Amount in $	Amount in $
Revenues:
Sales	111,950
Less: Sales discounts	2,000
Less: Sales returns & allowances	2,200
Net Sales		107,750
Cost of goods sold		40,000
Gross Profit		67,750
Expenses:
Selling Expenses:
Depreciation Expense	1,525
Sales salaries expense	17,500
Rent expense-Selling space	7,500
Store supplies expense	4,050
Advertising expense	9,800
Total Selling expenses	40,375
General & administrative expenses:
Insurance expense	1,400
Office salaries expense	17,500
Rent expense-Office space	7,500
Total General & administrative expenses	26,400
Total expenses		66,775
Net income		975

Explanation of Solution

Computation of total cost of goods sold:

Given,

Cost of Goods Sold as on Jan 31^st, 2015: $38,400

Cost of goods sold for year-end 2015: 10,900

Net cost of goods sold=$38,400-$10,900=$1,600
Therefore the total cost of goods sold is $38,400+$1,600=$40,000

Computation of Gross Profit: The formula for computing Gross profit is:

  $GrossProfit=NetSales-CostofGoodsSold$

Gross Profit $=\$107,750-\$40,000$

Gross Profit=$67,750

Computation of Net Income: The formula for calculating Net income is:

  $Netincome=Revenues-Expenses$

Revenues: $67,750 (Gross Profit)

Expenses: $66,775
Therefore the net income of Nelson Company is:

  $\$67,750-\$66,775=\$975$

Conclusion

Hence the net income of the Nelson Company for the year ended January 31^st, 2015 is $975.

Requirement-3:

To determine

To prepare:

The single-step income statement of Nelson Company for the year ended January 31^st, 2015 to determine the net income of the company.

Answer to Problem 5APSA

Solution:

Nelson Company Income Statement for the year ended January 31st,2015
Particulars	Amount in $	Amount in $
Net Sales		107,750
Expenses:
Cost of goods sold	40,000
Selling Expenses	40,375
General & Administrative Expenses	26,400
Total Expenses		106,775
Net Income		975

Explanation of Solution

Computation of Net Sales: The formula for calculating Net Sales is:

  $NetSales=Sales-Salesdiscounts-Salesreturnsandallowances$

Net Sales $=\$111,950-\$2,000-\$2,200=\$107,750$

Computation of total cost of goods sold:

Given,

Cost of Goods Sold as on Jan 31^st, 2015: $38,400

Cost of goods sold for year-end 2015: 10,900

Net cost of goods sold=$38,400-$10,900=$1,600
Therefore the total cost of goods sold is $38,400+$1,600=$40,000
Computation of total expenses:
  $Totalexpenses=Costofgoodssold+Sellingexpenses+GeneralandAdministrativeexpenses$

Total Cost of goods sold as calculated above is $40,000

Selling Expenses: Depreciation Expense ($1,525) + Sales Salaries Expense (17,500)+ Rent Expense for selling space (7,500)+Stores Supplies Expense (4,050)+Advertising Expense (9,800)=$40,375

General and Administrative Expenses: Insurance Expense (1,400) + Rent expense for office space (7,500) + Office Salaries Expense (17,500) = $26,400
Therefore total expenses using the formula is:

  $\$40,000+\$40,375+\$26,400=\$106,775$

Computation of Net income:
  $Netincome=Revenues-Expenses$

Revenues: $107,750
Expenses: $106,775
Net income $=\$107,750-\$106,775=\$975$

Conclusion

Hence the net income for Nelson Company for the year end is $975.

Requirement-4:

To determine

To Compute:

The current ratio and acid-test ratio and gross-margin ratio for Nelson Company for the year January 31^st, 2015.

1. Computation of Current Ratio:

Particulars	Amount in $	Amount in $
Current Assets:
Cash	1,000
Merchandise inventory	10,900
Store Supplies	1,750
Prepaid Insurance	1,000
Total Current Assets		14,650
Current Liabilities:		10,000
Current Ratio:
($14,650/$10,000)		1.47

Prepaid insurance: $2,400 − $1,400 = $1,000

Merchandise inventory: $12,500 − $1600 = $10,900

Explanation of Solution

The current ratio is computed by using the formula:

  $CurrentRatio=CurrentAssets/CurrentLiabilities$

2. Computation of Acid-test ratio:

Quick Assets-Cash: $1,000

Current Liabilities-Accounts Payable: $10,000

Acid-test ratio ($1,000/$10,000) = 0.10

Explanation:

The formula for Acid-test ratio is:

  $Acid-testratio=CurrentAssets-Inventory/CurrentLiabilities$

3. Computation of Gross Margin Ratio:

Particulars	Amount in $
Net Sales	107,750
Less: Cost of goods sold	40,000
Gross Profit/Margin	67,750
Gross Margin Ratio ($67,750/$107,750)	0.63

Explanation:

The formula for Gross Margin ratio is:

  $GrossMarginRatio=GrossMargin/NetSales$

Conclusion

Hence the current ratio is 1.47, acid-test ratio is 0.10 and gross margin ratio is 0.63 for Nelson Company as on January 31^st, 2015.