Question

(The following information applies to the questions displayed below.) 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 Credit Debit $ 19,100 14,500 5,800 2,500 42,500 $ 16,550 13,000 5,000 31,000 2,150 115,550 Cash Merchandise inventory Store supplies Prepaid insurance Store equipment Accumulated depreciation-store equipment Accounts payable Common stock Retained earnings Dividends Sales Sales discounts Sales returns and allowances Cost of goods sold Depreciation expense-Store equipment Sales salaries expense Office salaries expense Insurance expense Rent expense-Selling space Rent expense-office space Store supplies expense Advertising expense 1,950 2,100 38,000 0 13,800 13,800 7,500 7,500 0 9,900 $ 181,100 Totals $ 181,100 Additional Information: a. Store supplies still available at fiscal year-end amount to $2,550. b. Expired insurance, an administrative expense, is $1,400 for the fiscal year. c. Depreciation expense on store equipment, a selling expense, is $1,625 for the fiscal year. d. To estimate shrinkage, a physical count of ending merchandise inventory is taken. It shows $10,400 of inventory is still available at fiscal year-end. 4. Compute the current ratio, acid-test ratio, and gross margin ratio as of January 31. (Round your answers to 2 decimal places.) Current ratio Acid-test ratio Gross margin ratio 2.55:1 1.79:1

Answer 1

Firstly we need to Prepare Adjusted Trial Balance and we need to prepare Financial Statements then we calculate the following Ratios:-

Nelson Company

Worksheet

January 31

Accounts	Unadjusted	Trial Balance	Adjusting	Entries	Adjusted	Trial Balance
	Debit	Credit	Debit	Credit	Debit	Credit
Cash	$19,100				$19,100
Merchandise Inventory	14,500			$4,100	10,400
Store Supplies	5,800			$3,250	2,550
Prepaid Insurance	2,500			$1,400	1,100
Store Equipment	42,500				42,500
Accumulated Depreciation, Store Equipment		$16,550		$1,625		$18,175
Accounts Payable		13,000				13,000
Common Stock		5,000				5,000
Retained Earnings		31,000				31,000
Dividends	2,150				2,150
Sales		115,550				115,550
Sales Discounts	1,950				1,950
Sales Returns and Allowances	2,100				2,100
Cost of Goods Sold	38,000		$4,100		42,100
Depreciation Expense, Store Equipment	0		$1,625		1,625
Sales Salaries Expense	13,800				13,800
Office Salaries Expense	13,800				13,800
Insurance Expense	0		$1,400		1,400
Rent Expense, Selling Space	7,500				7,500
Rent Expense, Office Space	7,500				7,500
Store Supplies Expense	0		$3,250		3,250
Advertising Expense	9,900				9,900
Totals	$181,100	$181,100	$10,375	$10,375	$182,725	$182,725

Calculations for Ratios:-

Current Ratio:-

Current Ratio is calculated by dividing Current Assets by Current Liabilities.

Current Ratio=(Current Assets/ Current Liabilities)

=($33,150/$13,000)

=2.55:1

Acid Test Ratio:-

Acid Test Ratio is calculated by dividing Quick Assets (Current Assets - Merchandise Inventory - Prepaid Expenses) by Current Liabilities.

Acid Test Ratio=(Quick Assets/Current Liabilities)

Quick Assets=(Cash+Store Supplies)

=($19,100+$2,550)

=$21,650

Acid Test Ratio=($21,650/$13,000)

=1.67:1

Gross Margin Ratio:-

Gross Margin Ratio is calculated by dividing Gross Profit by Net Sales (Revenue).

Gross Margin Ratio=(Gross Profit/Net Sales)×100

=($69,400/$111,500)×100

=62.24%

Working Notes:-

Preparing Financial Statements as of January 31:-

Nelson Company

Income Statement

January 31

Accounts	Amount	Amount
Sales	$115,550
Less:- Sales Discounts	(1,950)
Less:- Sales Returns and Allowances	(2,100)
Net Sales	$111,500
Less:- Cost of Goods Sold	(42,100)
Gross Profit		$69,400
Less:- Operating Expenses:-
Selling Expenses:-
Depreciation Expense, Store Equipment	$1,625
Sales Salaries Expense	13,800
Rent Expense, Selling Space	7,500
Store Supplies Expense	3,250
Advertising Expense	9,900
General and Administrative Expenses:-
Office Salaries Expense	$13,800
Insurance Expense	1,400
Rent Expense, Office Space	7,500
Total Operating Expenses		$(58,775)
Net Income		$10,625

Nelson Company

Statement of Retained Earnings

January 31

Accounts	Amount
Retained Earnings, Beginning	$31,000
Add:- Net Income	10,625
	$41,625
Less:- Dividends	(2,150)
Retained Earnings, Ending	$39,475

Nelson Company

Balance Sheet

January 31

Accounts	Amount	Amount
Assets:-
Current Assets:-
Cash	$19,100
Merchandise Inventory	10,400
Store Supplies	2,550
Prepaid Insurance	1,100
Total Current Assets		$33,150
Fixed Assets:-
Store Equipment	$42,500
Less:- Accumulated Depreciation, Store Equipment	(18,175)
Total Fixed Assets		$24,325
Total Assets		$57,475
Liabilities and Stockholders Equity:-
Current Liabilities:-
Accounts Payable	$13,000
Total Current Liabilities		$13,000
Stockholders Equity:-
Common Stock	$5,000
Retained Earnings, Ending	39,475
Total Stockholders Equity		$44,475
Total Liabilities and Stockholders Equity		$57,475