NELSON COMPANY Unadjusted Trial Balance
January 31
Debit Credit
Cash $ 1,000
Merchandise inventory 12,500
Store supplies 5,800
Prepaid insurance 2,400
Store equipment 42,900
Accumulated depreciation—Store equipment $ 15,250
Accounts payable 10,000
Common stock 5,000
Retained earnings 27,000
Dividends 2,200
Sales 111,950
Sales discounts 2,000
Sales returns and allowances 2,200
Cost of goods sold 38,400
Depreciation expense—Store equipment 0
Sales salaries expense 17,500
Office salaries expense 17,500
Insurance expense 0
Rent expense—Selling space 7,500
Rent expense—Office space 7,500
Store supplies expense 0
Advertising expense 9,800
Totals $ 169,200 $ 169,200
Required
1. Prepare adjusting journal entries to reflect each of the following:
a. Store supplies still available at fiscal year-end amount to $1,750.
b. Expired insurance, an administrative expense, for the fiscal year is $1,400.
c. Depreciation expense on store equipment, a selling expense, is $1,525 for the fiscal year.
d. To estimate shrinkage, a physical count of ending merchandise inventory is taken. It shows $10,900 of inventory is still available at fiscal year-end.
2. Prepare a multiple-step income statement for the year ended January 31 that begins with gross sales and includes separate categories for net sales, cost of goods sold, selling expenses, and general and administrative expenses.
3. Prepare a single-step income statement for the year ended January 31.
4. Compute the current ratio, acid-test ratio, and gross margin ratio as of January 31. (Round ratios to two decimals.)

NELSON COMPANY

1. Adjusting Journal Entries:

a. Debit Supplies Expense $4,050

Credit Supplies $4,050

To record supplies expense for the year.

b. Debit Insurance Expense $1,400

Credit Prepaid Insurance $1,400

To record Insurance Expense for the year.

c. Debit Depreciation Expense $1,525

Credit Accumulated Depreciation - Store Equipment $1,525

To record depreciation expense for the year.

d. Debit Inventory Shrinkage $1,600

Credit Merchandise Inventory $1,600

To record inventory shrinkage.

2. Multi-step Income Statement for the year ended January 31

Sales                                                           $111,950

Sales returns and allowances                       2,200

Net Sales Revenue                                  $109,750

Cost of goods sold                                      38,400

Gross margin                                             $71,350

Selling Expenses:

Sales discounts                        2,000

Sales salaries expense           17,500

Rent expense—Selling space 7,500

Depreciation expense

 —Store equipment                1,525

Store supplies expense         4,050

Advertising expense              9,800

Inventory Shrinkage               1,600        

Total selling expenses      $43,975

Administrative Expenses:

Office salaries expense         17,500

Insurance expense                  1,400  

Rent expense—Office space 7,500      

Total administrative exp.   $26,400

Total Expense                                          ($70,375)

Net Income (Loss)                                         $975

3. Single-step Income Statement for the year ended January 31

Sales                                                           $111,950

Sales returns and allowances                       2,200

Net Sales Revenue                                  $109,750

Sales discounts                          2,000  

Cost of goods sold                  38,400

Depreciation expense

 —Store equipment                  1,525

Sales salaries expense           17,500

Office salaries expense         17,500

Insurance expense                  1,400

Rent expense—Selling space 7,500

Rent expense—Office space 7,500

Store supplies expense         4,050

Advertising expense             9,800

Inventory Shrinkage              1,600       ($108,775)

Net Income (Loss)                                         $975

4. Current Ratio = Current Assets/Current Liabilities

= $15,625/$10,000

= 1.56:1

Acid-Test Ratio = Cash/Current Liabilities

= $1,000/$10,000 =

= 0.1:1

Gross margin ratio = Gross margin/Net Sales * 100

= $71,350/$109,750 * 100

= 65.01%

Explanation:

NELSON COMPANY

Unadjusted Trial Balance

January 31

                                                     Debit              Credit

Cash                                           $ 1,000

Merchandise inventory              12,500

Store supplies                              5,800

Prepaid insurance                       2,400

Store equipment                        42,900

Accumulated depreciation—Store equipment $ 15,250

Accounts payable                                                  10,000

Common stock                                                       5,000

Retained earnings                                                27,000

Dividends                                    2,200

Sales                                                                     111,950

Sales discounts                          2,000

Sales returns and allowances   2,200

Cost of goods sold                  38,400

Depreciation expense—Store equipment 0

Sales salaries expense           17,500

Office salaries expense         17,500

Insurance expense                  0

Rent expense—Selling space 7,500

Rent expense—Office space 7,500

Store supplies expense           0

Advertising expense             9,800

Totals                              $ 169,200              $ 169,200

a. Stores Supplies, ending = $1,750

Supplies expense = $4,050 ($5,800 - $1,750)

b. Insurance Expense = $1,400

Prepaid insurance   - $1,000 (2,400 - 1,400)

c. Depreciation expense = $1,525

Accumulated Depreciation-Store Equipment = $16,775 (15,250+1,525)

d. Merchandise Inventory, ending = $10,900

Shrinkage = $1,600 (12,500 - 10,900)

NELSON COMPANY

Unadjusted Trial Balance

January 31

                                                     Debit              Credit

Cash                                            $ 1,000

Merchandise inventory               10,900

Store supplies                                1,750

Prepaid insurance                         1,000

Store equipment                        42,900

Accumulated depreciation—Store equipment $ 16,775

Accounts payable                                                  10,000

Common stock                                                        5,000

Retained earnings                                                27,000

Dividends                                    2,200

Sales                                                                     111,950

Sales discounts                          2,000

Sales returns and allowances   2,200

Cost of goods sold                  38,400

Depreciation expense

 —Store equipment                  1,525

Sales salaries expense           17,500

Office salaries expense         17,500

Insurance expense                  1,400

Rent expense—Selling space 7,500

Rent expense—Office space 7,500

Store supplies expense         4,050

Advertising expense             9,800

Inventory Shrinkage              1,600

Totals                              $ 170,725             $ 170,725

Current Assets:

Cash                                            $ 1,000

Merchandise inventory               10,900

Store supplies                                1,750

Prepaid insurance                         1,000

Total current assets                 $15,625

Current liabilities:

Accounts payable                    $10,000

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