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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.

Required:

1. Using the above information, prepare adjusting journal entries.
2. Prepare a multiple-step income statement for the year ended January 31.
3. Prepare a single-step income statement for the year ended January 31.

Required 1 Required 2 Required 3 Prepare a multiple-step income statement for the year ended January 31. NELSON COMPANY Income Statement For Year Ended January 31 Expenses Selling expenses Total selling expenses General and administrative expenses Total general and administrative expenses Total expenses < Required 1 Required 3 >

Answer 1

Account Titles	Debit	Credit
Store Supplies Expense	$          3,400
Store Supplies		$          3,400
Insurance Expense	$          1,650
Prepaid Insurance		$          1,650
Depreciation Expense	$          1,600
Accumulated Depreciation		$          1,600
Cost of Goods Sold	$          3,400
Inventory		$          3,400

Income Statement (Multi Step)
Sales Revenue		$      114,850
Less Sales Returns and Allowances		$          2,050
Less Sales Discounts		$          2,000
Net Sales Revenue			$      110,800
Cost of Goods Sold			$        41,400
Gross Profit			$        69,400
Operating Expenses
Selling Expenses
Advertising Expenses	$          9,800
Sales Salaries Expenses	$        15,400
Depreciation expense—Store equipment	$          1,600
Store supplies expense	$          3,400
Rent Expenses - Selling Space	$          6,500
Total Selling Expenses		$        36,700
General and Administrative Expenses
Office salaries expense	$        15,400
Insurance expense	$          1,650
Rent Expenses - Office Space	$          6,500
Total Administrative Expenses		$        23,550
Total Operating Expenses			$        60,250
Net Operating Income			$          9,150

Income Statement
Revenues
Net Sales Revenue		$      110,800
Expenses
Cost of Goods Sold	$        41,400
Selling Expenses	$        36,700
General and Administrative Expenses	$        23,550
Total Expenses		$     101,650
Net Income		$          9,150

Current Ratio = Current Assets / Current Liabilities

= ($20650+10600+1900+850) / 12000 = 2.83 : 1

Acid Test Ratio = Cash / Current Liabilities
= $20650 / 12000 = 1.72 : 1

Gross Margin Ratio = Gross Profit / Net Sales
= $69400 / 110800 = 62.64% or 0.63

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