Problem 5-5A Preparing adjusting entries and income statements; and computing gr
ID: 2733120 • 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.
Problem 5-5A Part 1
Using the above information prepare adjusting journal entries:
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.
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 3Learning 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.
16.
value:
11.11 points
Required information
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
Nelson Company All Amounts in $ Journal Entries Particulars Debit Credit Store Supplies Expense A/c 3950 To Store Supplies A/c 3950 Insurance Expense A/c 1800 To Prepaid Insurance A/c 1800 Depreciation Expense - Store Equipment A/c 1650 To Accumulated Depreciation - Store Equipment A/c 1650 Cost of Goods Sold A/c 2500 To Merchandise Inventory A/c 2500 Multi Step Income Statement for January 31, 2015 Sales 114750 Less : Sales Discounts 2000 Less : Sales Returns and Allowances 2250 4250 110500 Less : Cost of Goods Sold 40500 Contribution Margin 70000 Less : Selling Expenses Salaries Expense 14200 Rent Expense 8500 Advertising Expense 9600 32300 Less : General and Administrative Expenses Salaries Expense 14200 Rent Expense 8500 Insurance Expense 1800 Store Supplies Expense 3950 28450 Depreciation Expense - Store Equipment 1650 Net Income before Taxes 7600 Single Step Income Statement for the year ended 31 January 2015 Sales 114750 Less : Sales Discounts 2000 Less : Sales Returns and Allowances 2250 4250 110500 Less : Cost of Goods Sold 40500 Less : Indirect Expenses 62400 102900 Net Income before Taxes 7600 Current Assets and Liabilities Current Assets Cash 7500 Merchandise inventory 11000 Store supplies 1850 Prepaid insurance 800 Total 21150 Total less Merchandise Inventory and Store Supplies 8300 Current Liabilities Accounts Payable 15000 Current Ratio = Current Assets / Current Liabilities = 21150 / 15000 = 1.41 : 1 Acid-Test Ratio = Current Assets less Inventory / Current Liabilities = 8300 / 15000 = 0.553 : 1 Gross Margin Ratio = Contribution Margin / Sales = 63.35% (Sales are considered as net of discounts and allowances)