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Requirement-1a:
To prepare:
The adjusting
Requirement-1a:
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 31st, 2015 in unadjusted
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
Hence store supplies expense is debited with $4,050 and store supplies account is credited with the same amount.
Requirement-1b:
To Prepare:
The journal entry of Nelson Company to record
Requirement-1b:
Answer to Problem 5APSA
Solution:
| Date | General Journal | Debit ($) | 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.
Hence the insurance expense is debited with $1,400 and credited with prepaid insurance for expired insurance with $1,400.
Requirement-1c:
To Prepare:
The journal entry for Nelson Company for adjusted entry to record
Requirement-1c:
Answer to Problem 5APSA
Solution:
| Date | General Journal | Debit ($) | Credit ($) |
| Jan 31 | Depreciation expense (Store Equipment) | 1,525 | |
| | 1,525 |
Explanation of Solution
Given the depreciation expense on store equipment, a selling expense is $1,525 for the fiscal year.
Hence the depreciation expense for store equipment is debited with $1,525 and credited with accumulated depreciation of $1,525.
Requirement-1d:
To prepare:
The journal entry to record the adjusting entry for merchandise inventory available with Nelson Company at the fiscal year-end.
Requirement-1d:
Answer to Problem 5APSA
Solution:
| Date | General Journal | Debit ($) | Credit ($) |
| Jan 31 | Cost of goods sold | 1,600 | |
| Merchandise inventory | 1,600 |
Explanation of Solution
Merchandise inventory as on January 31st, 2015: $12,500
Merchandise inventory available on fiscal year-end: $10,900
Therefore the net merchandise inventory is $12,500-$10,900=$1,600
Hence the cost of goods sold is debited with $1,600 and credited with merchandise inventory account for $1,600.
Requirement-2:
To Prepare:
The multi-step income statement for Nelson Company for the year ended January 31st, 2015 to determine the net income of the company.
Requirement-2:
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 31st, 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:
Gross Profit
Gross Profit=$67,750
Computation of Net Income: The formula for calculating Net income is:
Revenues: $67,750 (Gross Profit)
Expenses: $66,775
Therefore the net income of Nelson Company is:
Hence the net income of the Nelson Company for the year ended January 31st, 2015 is $975.
Requirement-3:
To prepare:
The single-step income statement of Nelson Company for the year ended January 31st, 2015 to determine the net income of the company.
Requirement-3:
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:
Net Sales
Computation of total cost of goods sold:
Given,
Cost of Goods Sold as on Jan 31st, 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:
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:
Computation of Net income:
Revenues: $107,750
Expenses: $106,775
Net income
Hence the net income for Nelson Company for the year end is $975.
Requirement-4:
To Compute:
The
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
Requirement-4:
Explanation of Solution
The current ratio is computed by using the formula:
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:
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:
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 31st, 2015.
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