Question

The following unadjusted trial balance is prepared at fiscal year-end for Foster Products Company.

Rent expense and salaries expense are equally divided between selling activities and general and administrative activities. Foster Products Company uses a perpetual inventory system.

Required

1. Prepare adjusting journal entries to reflect each of the following:

a. Store supplies still available at fiscal year-end amount to \(3,700.

b. Expired insurance, an administrative expense, for the fiscal year is \)2,800.

c. Depreciation expense on store equipment, a selling expense, is \(3,000 for the fiscal year.

d. To estimate shrinkage, a physical count of ending merchandise inventory is taken. It shows \)21,300 of inventory is still available at fiscal year-end.

2. Prepare a multiple-step income statement for fiscal year 2017 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 fiscal year 2017.

4. Compute the current ratio, acid-test ratio, and gross margin ratio as of October 31, 2017. (Round ratios to two decimals.)

Short answer

Answer

1. Both sides of the journal totals$14,500.
2. Net income of the business entity is$24,000.
3. Current ratio is 3.32, Quick ratio is 0.41, and gross profit margin is 65.29%for the fiscal year 2017.

Step-by-step solution

Step-by-Step SolutionStep 1: Definition of Adjusting Entries

Journal entries made at the year-end for updating the balances of both temporary and permanent accounts, are known as adjusting entries.

Adjusting journal entries

Date	Accounts and Explanation	Debit $	Credit $
31 Oct 2017	Store supplies expenses	6,000
	Store supplies		6,000
31 Oct 2017	Insurance expenses	2,800
	Prepaid insurance		2,800
31 Oct 2017	Depreciation expenses – store equipment	3,000
	Accumulated depreciation		3,000
31 Oct 2017	Inventory shrinkage	2,700
	Merchandise inventory		2,700
		$14,500	$14,500

Multi-step income statement

Particular	Amount $	Amount $
Sales	$227,100
Less: Sales discount	(1,000)
Inventory shrinkage	(2,700)
Less: Sales return and allowance	(5,000)
Net sales		218,400
Less: Cost of goods sold		(75,800)
Gross profit		142,600
Less: Expenses
Depreciation expenses – store equipment		(3,000)
Salaries expenses		(63,000)
Insurance expense		(2,800)
Rent expense		(26,000)
Store supplies expense		(6,000)
Advertising expense		(17,800)
Net income		$24,000

Single-step income statement

Particular	Amount $	Amount $
Sales		$227,100
Less: expenses/contra-revenue
Sales discount		(1,000)
Inventory shrinkage		(2,700)
Sales return and allowance		(5,000)
Cost of goods sold		(75,800)
Depreciation expenses – store equipment		(3,000)
Salaries expenses		(63,000)
Insurance expense		(2,800)
Rent expense		(26,000)
Store supplies expense		(6,000)
Advertising expense		(17,800)
Net income		$24,000

Financial ratios

Current ratio:

$\begin{array}{c}\text{Current ratio=}\frac{\text{Current assets}}{\text{Current liabilities}}\\ \text{=}\frac{\text{\$7,000+\$21,300+\$3,700+\$3,800+\$24,000}}{\text{\$18,000}}\\ \text{=3.32}\end{array}$

Acid test ratio:

$\begin{array}{c}\text{Acid test ratio=}\frac{\text{Quick assets}}{\text{Current liabilities}}\\ \text{=}\frac{\text{\$7,400}}{\text{\$18,000}}\\ \text{=0.41}\end{array}$

Gross margin ratio:

$\begin{array}{c}\text{Gross margin ratio=}\frac{\text{Gross profit}}{\text{Sales}}\text{×100}\\ \text{=}\frac{\text{\$142,600}}{\text{\$218,400}}\text{×100}\\ \text{=65.29\%}\end{array}$