Question

Ocean Life Boat Supply uses the periodic inventory method. The adjusted trial balance of Ocean Life Boat Supply at December 31, 2018, follows:

Requirements

1. Journalize the required closing entries at December 31, 2018. Assume ending Merchandise Inventory is $54,300.

2. Set up T-accounts for Income Summary; Retained Earnings; and Dividends. Post the closing entries to the T-accounts, and calculate their ending balances.

3. How much was Ocean Life’s net income or net loss?

Short answer

The net income of the company is$97,600.

Step-by-step solution

Meaning of Net Income

In accounting, net income refers to the amount of profit left with the company after the settlement all operating and non-operating expenses and applicable income taxes. Net income is computed with the help of a report called an income statement.

Preparation of closing entries

Date	Accounts and Explanation	Debit ($)	Credit ($)
2018
Dec 31	Sales revenue	315,800
	Interest revenue	3,400
	Income summary		319,200
	(To close the revenue accounts)
Dec 31	Income summary	221,600
	Cost of goods sold (WN-1)		161,100
	Selling expenses		38,600
	Administrative expenses		21,900
	(To close the expenses accounts)
Dec 31	Income summary (319200-221600)	97,600
	Retained Earnings		97,600
	(To close income summary account)
Dec 31	Retained earnings	60,600
	Dividends		60,600
	(To close the dividend account)

Working Notes:

1. Computation of Cost of goods sold:

   Particulars	Amounts ($)
   Opening inventory	44,500
   Add: Net purchases (WN-a)	170,900
   Less: Closing inventory	(54,300)
   Cost of goods sold	$161,100

(a) Computation of Net purchases:

Particulars	Amounts ($)
Purchases	274,500
Less: Returns and allowances	(94,600)
Less: Purchase discounts	(9,000)
Net purchases	$170,900

Preparation of T-accounts

Income Summary

Date	Particulars	Amount ($)	Date	Particulars	Amount ($)
2018			2018
Dec 31	Expenses	221,600	Dec 31	Revenues	319,200
	Retained earnings	97,600	Dec 31	Ending balance	0

Retained Earnings

Date	Particulars	Amount ($)	Date	Particulars	Amount ($)
2018			2018
Dec 31	Dividends	60,600	Dec 31	Beginning balance	34,100
	Ending balance	71,100	Dec 31	Income summary	97,600

Dividends

Date	Particulars	Amount ($)	Date	Particulars	Amount ($)
2018			2018
Dec 31	Beginning balance	60,600	Dec 31	Retained earnings	60,600
	Retained earnings	97,600	Dec 31	Ending balance	0

Computation of net income

$$\begin{gathered} \text{Net Income}=\text{Revenues}-\text{Expenses} \\ =\$319,200-\$221,600 \\ =\$97,600 \end{gathered}$$