Problem 5-5A Preparing adjusting entries and income statements; and computing gr
ID: 2733029 • Letter: P
Question
Problem 5-5A Preparing adjusting entries and income statements; and computing gross margin, acid-test, and current ratios LO A1, A2, P3, P4
[The following information applies to the questions displayed below.]
The following unadjusted trial balance is prepared at fiscal year-end for Nelson Company.
J. Nelson, Capital
Sales
Rent expense and salaries expense are equally divided between selling activities and the general and administrative activities. Nelson Company uses a perpetual inventory system.
To estimate shrinkage, a physical count of ending merchandise inventory is taken. It shows $11,000 of inventory is still available at fiscal year-end.
References
Section BreakProblem 5-5A Preparing adjusting entries and income statements; and computing gross margin, acid-test, and current ratios LO A1, A2, P3, P4
Problem 5-5A Part 1
Using the above information prepare adjusting journal entries:
References
WorksheetLearning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity.Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Problem 5-5A Part 1Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability.
Difficulty: 3 HardLearning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company.
Problem 5-5A Part 2
Prepare a multiple-step income statement for fiscal year 2015.
Problem 5-5A Part 3
Prepare a single-step income statement for fiscal year 2015.
Problem 5-5A Part 4
Compute the current ratio, acid-test ratio, and gross margin ratio as of January 31, 2015. (Round your answers to 2 decimal places.)
The following unadjusted trial balance is prepared at fiscal year-end for Nelson Company.
Explanation / Answer
Answer:
In the books of Nelson Company:
1.Income Statement for the fiscal year 2015:
Particulars
Amount ($)
Sales
114,750
(-) Sales Discount
2,000
(-) Sales Return
2,250
(-) Cost of Goods Sold
38,000
(-) Rent Expense
8,500
(-) Salaries Expense
14,200
(-) Closing Stock
11,000
(+) Opening Stock
13,500
Gross Profit…….
52,500
(-) Salaries expense
14,200
(-) Insurance expense
0
Outstanding Insurance expense
1,800
(-) Rent expense
8,500
(-) Store supplies expense
0
Store supplies still at the company
1,850
(-) Advertising expense
9,600
(-) Depreciation
1,650
Net Profit………
14,900
2.Balance Sheet for the fiscal year 2015:
Liabilities
Amount ($)
Amount ($)
Assets
Amount ($)
Amount ($)
Capital
36,000
48,650
Fixed Assets
(-) Withdrawals
2,250
Store Equipment
43,000
25,200
(+) Profit
14,900
(-) Depreciation for the year
1,650
(-) Accumulated Depreciation
16,150
Miscellaneous Gain
1,500
Current Liabilities:
Current Assets:
Accounts Payable
15,000
Cash
17,500
Outstanding Insurance
1,800
Closing Stock
11,000
Store Supplies
5,800
7,650
(+) Store supplies still at the company
1,850
Prepaid Insurance
2,600
65,450
65,450
3.Acid test Ratio or Current Ratio = Current Assets / Current Liabilities
Therefore, Acid Test Ratio = $38,750 / $16,800
Hence, Current Ratio = 2.30 as on 31st January, 2015
The current ratio is a liquidity and efficiency ratio that measures a firm's ability to pay off its short-term liabilities with its current assets. The current ratio is an important measure of liquidity because short-term liabilities are due within the next year. This ratio is also known as Acid test Ratio.
4.Gross Margin Ratio = Gross Profit / Sales ( Sales – Sales Return- Sales Discount)
Therefore, Gross Margin Ratio = $52,500 / $110,500
Hence, Gross Margin Ratio = 0.475 as on 31stJanuary, 2015
Gross margin ratio is a profitability ratio that compares the gross margin of a business to the net sales. This ratio measures how profitable a company sells its inventory or merchandise. In other words, the gross profit ratio is essentially the percentage markup on merchandise from its cost.
Particulars
Amount ($)
Sales
114,750
(-) Sales Discount
2,000
(-) Sales Return
2,250
(-) Cost of Goods Sold
38,000
(-) Rent Expense
8,500
(-) Salaries Expense
14,200
(-) Closing Stock
11,000
(+) Opening Stock
13,500
Gross Profit…….
52,500
(-) Salaries expense
14,200
(-) Insurance expense
0
Outstanding Insurance expense
1,800
(-) Rent expense
8,500
(-) Store supplies expense
0
Store supplies still at the company
1,850
(-) Advertising expense
9,600
(-) Depreciation
1,650
Net Profit………
14,900