Question

Problem 4-5A Preparing adjusting entries and income statements; computing gross margin, acid-test, and current ratios LO A1, A2, P3, P4

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

NELSON COMPANY Unadjusted Trial Balance January 31, 2018
	Debit			Credit
Cash	$	9,500
Merchandise inventory		12,500
Store supplies		5,800
Prepaid insurance		2,300
Store equipment		42,700
Accumulated depreciation—Store equipment				$	17,550
Accounts payable					13,000
Common stock					3,600
Retained earnings					18,000
Dividends		2,150
Sales					114,600
Sales discounts		1,850
Sales returns and allowances		2,150
Cost of goods sold		38,000
Depreciation expense—Store equipment		0
Salaries expense		27,900
Insurance expense		0
Rent expense		12,000
Store supplies expense		0
Advertising expense		9,900
Totals	$	166,750		$	166,750

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

Additional Information:

1. Store supplies still available at fiscal year-end amount to $1,850.
2. Expired insurance, an administrative expense, for the fiscal year is $1,450.
3. Depreciation expense on store equipment, a selling expense, is $1,550 for the fiscal year.
4. To estimate shrinkage, a physical count of ending merchandise inventory is taken. It shows $10,200 of inventory is still available at fiscal year-end.

Problem 4-5A Part 4

4. Compute the current ratio, acid-test ratio, and gross margin ratio as of January 31, 2018. (Round your answers to 2 decimal places.)

Answer 1

4) Current Ratio:
Cash	$9,500
Merchandise Inventory	$10,200
Store Supplies	$1,850
Prepaid Insurance ($2,300 - $1,450)	$850
Total Current Assets (a)	$22,400
Accounts Payable	$13,000
Total Current Liabilities (b)	$13,000
Current Ratio (a / b)	1.72
Acid-test Ratio:
Cash	$9,500
Store Supplies	$1,850
Quick Assets (c )	$11,350
Total Current Liabilities (d)	$13,000
Quick Ratio (c / d)	0.87
Gross Margin Ratio:
Sales	$114,600
Less: Sales Discounts	($1,850)
Less: Sales Returns and allowances	($2,150)
Net Sales (e )	$110,600
Less: Cost of Goods Sold	($38,000)
Gross Margin (f)	$72,600
Gross Margin Ratio (f / e * 100)	65.64%