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Save Mart was a retail store. Its account balances on February 28 (the end of its fiscal year),...

Question:

Save Mart was a retail store. Its account balances on February 28 (the end of its fiscal year), before adjustments, were as shown below:

Debit Balances Credit Balances
Cash $88,860 Accumulated depreciation on store equipment $11,420
Accounts receivable 127,430 Notes payable 88.500
Merchandise inventory 903,130 Accounts payable 88,970
Store equipment 70,970 Common stock 100,00
Prepaid insurance 12,430 Retained earnings 33,500
Selling expense 10,880 Sales 988,700
Sales salaries 47,140
Misc. general expense 18,930
Sales discounts 3,340
Interest expense 7,100
Social security tax expense 3,400
Total $1,311,090 Total $1,311,090

The data for the adjustments are:

1. Cost of merchandise sold, $604,783.

2. Store equipment depreciation for the year, $7,097

3. Supplies inventory. February 28, $3,877 (Purchases of supplies during the year were debited to the Supplies Inventory account.

4. Expired insurance, $7,125.

5. The note payable was at an interest rate of 9 percent, payable monthly. It had been outstanding throughout the year.

6. Sales salaries earned but not paid to employees, $2,340.

7. The statement sent by the bank, adjusted for checks outstanding, showed a balance of $88,110. The difference represented bank service charges.

Required

1. Set up T accounts with the balances given above.

2. Journalize and post adjusting entries, adding other T accounts as necessary.

3. Journalize and post closing entries.

4. Prepare an income statement for the year and a balance sheet as of February 28.

Adjusting Entries:

Adjusting entries are usually prepared during year end, wherein, expenses and revenues are recognized at the time these are incurred, regardless of whether these are already paid or collected or still form part of the payable and receivables account. Adjusting entries do not involve the cash account.

Answer and Explanation:

1. Set up T accounts with the balances given above.

Account Debit Credit
Cash 88,860
Accounts Receivables 127,430
Merchandise Inventory 903,130
Supply Inventory 17,480
Store Equipment 70,970
Prepaid Insurance 12,430
Selling Expense 10,880
Sales Salaries 47,140
Miscellaneous General Expense 18,930
Sales Discounts 3,340
Interest Expense 7,100
Social Security Tax Expense 3,400
Accumulated Depreciation on Store Equipment 11,420
Notes Payable 88,500
Accounts Payable 88,970
Common Stock 100,000
Retained Earnings 33,500
Sales 988,700


2. Journalize and post adjusting entries, adding other T accounts as necessary.

Reference Account Debit Credit
1 Cost of Goods Sold 604,783
Merchandise Inventory 604,783
To record the cost of inventory sold.
2 Depreciation Expense-Store Equipment 7,097
Accumulated Depreciation-Store Equipment 7,097
To record the depreciation expense.
3 Supplies Expense 13,603
Supplies Inventory 13,603
To record the supplies.
4 Insurance Expense 7,125
Prepaid Insurance 7,125
To record the insurance expired.
5 Interest Expense 7,965
Interest Payable 7,965
To record the interest accrued.
6 Sales Salaries Expense 2,340
Sales Salaries Payable 2,340
To record the accrued salaries.
7 Finance Charge 750
Cash 750
To record the reconciling accounts on cash account.


Account Debit Credit
Cash 88,860
7 750
Balance 88,110
Accounts Receivables 127,430
Balance 127,430
Merchandise Inventory 903,130
1 604,783
Balance 298,347
Supply Inventory 17,480
3 13,603
Balance 3,877
Store Equipment 70,970
Balance 70,970
Prepaid Insurance 12,430
4 7,125
Balance 5,305
Selling Expense 10,880
Balance 10,880
Sales Salaries 47,140
6 2,340
Balance 49,480
Miscellaneous General Expense 18,930
Balance 18,930
Sales Discounts 3,340
Balance 3,340
Interest Expense 7,100
5 7,965
Balance 15,065
Social Security Tax Expense 3,400
Balance 3,400
Accumulated Depreciation on Store Equipment 11,420
2 7,097
Balance 19,327
Notes Payable 88,500
Balance 88,500
Accounts Payable 88,970
Balance 88,970
Common Stock 100,000
Balance 100,000
Retained Earnings 33,500
Balance 33,500
Sales 988,700
Balance 988,700
Cost of Goods Sold 604,783
Balance 604,783
Depreciation Expense-Store Equipment 7,097
Balance 7,097
Supplies Expense 13,603
Balance 13,603
Insurance Expense 7,125
Balance 7,125
Interest Payable 7,965
Balance 7,965
Sales Salaries Payable 2,340
Balance 2,340
Finance Charge 750
Balance 750

3. Journalize and post closing entries.

Sales 988,700
Income and Expense Summary 988,700
Sales Discount 3,340
To close the sales and sales discount accounts.
Income and Expense Summary 731,923
Selling Expense 10,880
Sales Salaries Expense 49,480
Miscellaneous General Expense 18,930
Interest Expense 15,065
Social Security Tax Expense 3,400
Cost of Goods Sold 604,783
Depreciation Expense-Store Equipment 7,907
Supplies Expense 13,603
Insurance Expense 7,125
Finance Charge 750
To close the costs and expense accounts.


Selling Expense 10,880
Closing 10,880
Balance 0
Sales Salaries 47,140
6 2,340
Closing 49,480
Balance 0
Miscellaneous General Expense 18,930
Closing 18,930
Balance 0
Sales Discounts 3,340
Closing 3,340
Balance 0
Interest Expense 7,100
5 7,965
Closing 15,065
Balance 0
Social Security Tax Expense 3,400
Closing 3,400
Balance 0
Retained Earnings 33,500
Closing of Net Income 253,437
Balance 286,937
Sales 988,700
Closing 988,700
Balance 0
Cost of Goods Sold 604,783
Closing 604,783
Balance 0
Depreciation Expense-Store Equipment 7,097
Closing 7,097
Balance 0
Supplies Expense 13,603
Closing 13,603
Balance 0
Insurance Expense 7,125
Closing 7,125
Balance 0
Finance Charge 750
Closing 750
Balance 0


4. Prepare an income statement for the year and a balance sheet as of February 28.

Sales 988,700
Sales Discount -3,340
Net Sales 985,360
Cost of Goods Sold -604,783
Gross Margin 380,577
Selling Expense -10,880
Sales Salaries Expense -49,480
Miscellaneous General Expense -18,930
Interest Expense -15,065
Social Security Tax Expense -3,400
Depreciation Expense-Store Equipment -7,907
Supplies Expense -13,603
Insurance Expense -7,125
Finance Charge -750
Net Income 253,437

Learn more about this topic:

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How to Make an Income Statement: Example & Analysis

from Accounting 201: Intermediate Accounting I

Chapter 5 / Lesson 6
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