Question

The following unadjusted trial balance is prepared at fiscal year-end for Nelson Company. Nelson company uses a perpetual inventory system. It categorizes the following accounts as selling expenses: Depreciation Expense—Store Equipment, Sales Salaries Expense, Rent Expense—Selling Space, Store Supplies Expense, and Advertising Expense. It categorizes the remaining expenses as general and administrative.

NELSON COMPANY Unadjusted Trial Balance January 31
	Debit			Credit
Cash	$	20,650
Merchandise inventory		14,000
Store supplies		5,300
Prepaid insurance		2,500
Store equipment		42,900
Accumulated depreciation—Store equipment				$	19,200
Accounts payable					12,000
Common stock					5,000
Retained earnings					32,000
Dividends		2,050
Sales					114,850
Sales discounts		2,000
Sales returns and allowances		2,050
Cost of goods sold		38,000
Depreciation expense—Store equipment		0
Sales salaries expense		15,400
Office salaries expense		15,400
Insurance expense		0
Rent expense—Selling space		6,500
Rent expense—Office space		6,500
Store supplies expense		0
Advertising expense		9,800
Totals	$	183,050		$	183,050

Additional Information:

1. Store supplies still available at fiscal year-end amount to $1,900.
2. Expired insurance, an administrative expense, is $1,650 for the fiscal year.
3. Depreciation expense on store equipment, a selling expense, is $1,600 for the fiscal year.
4. To estimate shrinkage, a physical count of ending merchandise inventory is taken. It shows $10,600 of inventory is still available at fiscal year-end.

1. Using the above information, prepare adjusting journal entries.

Answer 1

Answer:

No	Date	General Journal	Debit	Credit
1	Jan-31	Store supplies expense	3,400
		Store supplies		3,400
		To record the store supplies available
2	Jan-31	Insurance expense	1,650
		Prepaid insurance		1,650
		To record the expired insurance
3	Jan-31	Depreciation expense-Store equipment	1,600
		Accumulated depreciation-Store equipment		1,600
		To record the depreciation expense on store equipment
4	Jan-31	Cost of goods sold	3,400
		Merchandise inventory		3,400
		To record the estimated shrinkage

Calculation:

Entry #1:To record the store supplies available

Store supplies still available at fiscal year-end = $1,900

Store supplies Balance = 5,300

So the Store supplies expense = Store supplies Balance - Store supplies still available at fiscal year-end = 5,300 - 1,900 = 3,400

Here we need to debit the store supplies expense account for the cost of the supplies used. Then we need to balance the entry by crediting your store supplies account.

Entry #2:To record the expired insurance

Expired insurance, an administrative expense =  $1,650

The insurance expires over the time. So we need to debit the expense account of expired insurance. Also we need to credit prepaid insurance as we need to show the reduction in the balance in the asset account.

Entry #3:To record the depreciation expense on store equipment

Depreciation expense on store equipment, a selling expense, = $1,600

Here we need to debit the Depreciation Expense account and credit the Accumulated Depreciation account inorder to offset the Store equipment.

Entry #4:To record the estimated shrinkage

Merchandise inventory balance = 14,000

Inventory is still available at fiscal year-end = 10,600

Estimated shrinkage = 14,000 - 10,600 = 3,400

Shrinkage expense account will be recorded under the Cost of Goods Sold. So we need to debit the Cost of Goods Sold and then credit the Merchandise inventory account.