51PS - Horngren'S Financial And Managerial Accounting

Question

Journalizing purchase and sale transactions, making closing entries, preparing financial statements, and computing the gross profit percentage

This problem continues the Crystal Clear Cleaning practice set begun in Chapter 2 and continued through Chapters 3 and 4. 

Crystal Clear Cleaning has decided that, in addition to providing cleaning services, it will sell cleaning products. Crystal Clear uses the perpetual inventory system. During December 2018, Crystal Clear completed the following transactions:

Dec. 2	Purchased 1,000 units of inventory for \(4,000 on account from Sparkle Company on terms, 5/10, n/20.
5	Purchased 1,200 units of inventory from Borax on account with terms 4/10, n/30. The total invoice was for \)6,000, which included a \(300 freight charge.
7	Returned 300 units of inventory to Sparkle from the December 2 purchase (cost \)1,200).
9	Paid Borax.
11	Sold 500 units of goods to Happy Maids for \(5,500 on account with terms n/30. Crystal Clear’s cost of the goods was \)2,000.
12	Paid Sparkle.
15	Received 100 units with a retail price of \(1,100 back from customer Happy Maids. The goods cost Crystal Clear \)400.
21	Received payment from Happy Maids, settling the amount due in full
28	Sold 500 units of goods to Bridget, Inc. on account for \(6,500 (cost \)2,022). Terms 1/15, n/30.
29	Paid cash for utilities of \(550.
30	Paid cash for Sales Commission Expense of \)214.
31	Received payment from Bridget, Inc., less discount.
31	Recorded the following adjusting entries: a. Physical count of inventory on December 31 showed 800 units of goods on hand, with a cost of \(3,848.  b. Depreciation, \)150.  c. Accrued salaries expense of \(2,100.  d. Estimated sales returns of \)1,500, with cost of \(540.  e. Prepared all other adjustments necessary for December (Hint: You will need to review the adjustment information in Chapter 3 to determine the remaining adjustments). Assume the cleaning supplies left at December 31 are \)50.

 

Requirements 

1. Open the following T-accounts in the ledger: Cash, \(51,650; Accounts Receivable, \)4,000; Merchandise Inventory, \(0; Estimated Returns Inventory, \)0; Cleaning Supplies, \(50; Prepaid Rent, \)3,000; Prepaid Insurance, \(4,400; Equipment, \)5,400; Truck, \(3,000; Accumulated Depreciation, \)150; Accounts Payable, \(1,245; Salaries Payable, \)0; Interest Payable, \(59; Refunds Payable, \)0; Unearned Revenue, \(14,375; Notes Payable, \)36,000; Common Stock, \(18,000; Retained Earnings, \)1,671; Income Summary, \(0; Dividends, \)0; Service Revenue, \(0; Sales Revenue, \)0; Cost of Goods Sold, \(0; Salaries Expense, \)0; Sales Commission Expense, \(0; Utilities Expense, \)0; Depreciation Expense, \(0; Rent Expense, \)0; Insurance Expense, \(0; Interest Expense, \)0.
2. Journalize and post the December transactions. Omit explanations. Compute each account balance, and denote the balance as Balance. Identify each accounts payable and accounts receivable with the vendor or customer name. 
3. Journalize and post the adjusting entries. Omit explanations. Denote each adjusting amount as Adj. Compute each account balance, and denote the balance as Balance. After posting all adjusting entries, prove the equality of debits and credits in the ledger by preparing an adjusted trial balance. 
4.  Prepare the single step income statement and statement of retained earnings for the month ended December 31, 2018. Also prepare a classified balance sheet at December 31, 2018. Assume the note payable is long-term. 
5. Compute the gross profit percentage for December for the company

Step-by-Step Solution

Answer

1. Ledgers are created with their respective values; some have 0 balance opening.
2. The total amount of debit and credit side of the journal is $49,056
3. The total amount of debit and credit side of the journal is $8,136
4. Net Income = $2,128
5. Gross profit = 57.14%

Step 1: Meaning of Gross Profit

Gross profit is displayed on a multiple-step pay explanation earlier to deducting offering, general and administrative costs, and earlier to non-operating incomes, non-operating costs, gains, and losses.

Step 2: (1) Preparing Ledgers

Dr.	Cash	Cr.
Balance	$51,650

 

Dr.	Account receivable	Cr.
Balance	$4,000

 

Dr.	Merchandise Inventory	Cr.
Balance	$0

 

Dr.	Estimated returns inventory	Cr.
Balance	$0
Dr.	Cleaning Supplies	Cr.
Balance	$50

 

Dr.	Prepaid Rent	Cr.
Balance	$3,000

 

Dr.	Prepaid Insurance	Cr.
Balance	$4,400

 

Dr.	Equipment	Cr.
Balance	$5,400

 

Dr.	Truck	Cr.
Balance	$3,000

 

Dr.	Accumulated depreciation	Cr.
		$150	Balance

 

Dr.	Accounts payable	Cr.
		$1,245	Balance

 

Dr.	Salaries Payable	Cr.
		$0	Balance

 

Dr.	Interest Payable	Cr.
		$59	Balance

 

Dr.	Refund Payable	Cr.
		$0	Balance

 

Dr.	Unearned revenue	Cr.
		$14,375	Balance

 

Dr.	Notes Payable	Cr.
		$36,000	Balance

 

Dr.	H. Capital	Cr.
		$19,671	Balance

 

Dr.	Income summary	Cr.
		$0	Balance

 

Dr.	H. Withdrawals	Cr.
Balance	$0

 

Dr.	Service Revenue	Cr.
		$0	Balance

 

Dr.	Sales Revenue	Cr.
		$0	Balance

 

Dr.	Cost of goods sold	Cr.
Balance	$0

 

Dr.	Salaries Expense	Cr.
Balance	$0

 

Dr.	Sales Commission Expense	Cr.
Balance	$0

 

Dr.	Utilities Expense	Cr.
Balance	$0

 

Dr.	Depreciation Expense	Cr.
Balance	$0

 

Dr.	Rent Expense	Cr.
Balance	$0

 

Dr.	Insurance Expense	Cr.
Balance	$0

 

Dr.	Interest Expense	Cr.
Balance	$0

Step 3: (2) Preparing journal entry

Date	Particulars	Debit ($)	Credit ($)
Dec. 2	Merchandise inventory	4,000
	Account payable-SC		4,000
Dec. 5	Merchandise inventory	6,000
	Accounts payable-B		6,000
Dec. 7	Accounts payable-SC	1,200
	Merchandise inventory		1,200
Dec. 9	Accounts payable-B	6,000
	Cash		5,772
	Merchandise inventory		228
Dec. 11	Accounts receivable-HM	5,500
	Sales revenue		5,500
	Cost of goods sold	2,000
	Merchandise inventory		2,000
Dec. 12	Accounts payable-SC	2,800
	Cash		2,660
	Merchandise inventory		140
Dec. 15	Sales revenue	1,100
	Accounts receivables-HM		1,100
	Merchandise inventory	400
	Cost of goods sold		400
Dec. 27	Cash	4,400
	Accounts receivables-HM		4,400
Dec. 28	Accounts receivable-BI	6,435
	Sales revenue		6,435
	Cost of goods sold	2,022
	Merchandise inventory		2,022
Dec. 29	Utility expense	550
	Cash		550
Dec. 30	Sales commission expense	214
	Cash		214
Dec. 31	Cash	$6,435
	Accounts receivables-BI		$6,435

 

Preparing Ledgers

Dr.	Cash	Cr.
Balance	$51,650	$5,772	Dec. 9
Dec. 21	4,400	2,660	Dec. 12
Dec. 31	6,435	550	Dec. 29
		$214	Dec. 30
Balance	$53,289

 

Dr.	Account receivable	Cr.
Balance	$4,000	$1,100	Dec. 15
Dec. 11	5,500	4,400	Dec. 21
Dec. 28	6,435	6,435	Dec. 31
Balance	$4,000

 

Dr.	Merchandise Inventory	Cr.
Balance	$0
Dec. 2	4,000	$1,200	Dec.  7
Dec. 5	6,000	228	Dec. 9
Dec. 15	400	2,000	Dec. 11
		140	Dec. 12
		$2,022	Dec. 28
Balance	$4,810
Dr.	Accounts payable	Cr.
Dec. 7	$1,200	$1,245	Balance
Dec. 9	6,000	4,000	Dec. 2
Dec. 12	$2,800	6,000	Dec. 5
		$1,245	Balance

 

Dr.	Sales Revenue	Cr.
Dec. 15	$1,100	$0	Balance
		5,500	Dec. 11
		6,435	Dec. 28
		$10,835	Balance

 

Dr.	Cost of goods sold	Cr.
Balance	$0	$400	Dec. 15
Dec. 11	2,000
Dec. 28	2,022
Balance	$3,622

 

Dr.	Sales Commission Expense	Cr.
Balance	$ 0
Dec. 30	214
Balance	$214

 

Dr.	Utility expense	Cr.
Balance	$0
Dec. 29	550

Step 4: (3) Preparing journal entry

Date	Particulars	Debit ($)	Credit ($)
Dec. 31	Cost of goods sold	962
	Merchandise inventory		962
Dec. 31	Depreciation expense	150
	Accumulated depreciation		150
Dec. 31	Salaries expense	2,100
	Salaries payable		2,100
Dec. 31	Salaries revenue	1,500
	Refund payable		1,500
	Estimated returns inventory	540
	Cost of goods sold		540
Dec. 4	Accounts payable	175
	Cash		175
Dec. 31	Rent expense	1,000
	Prepaid rent		1,000
Dec. 31	Insurance expense	400
	Prepaid insurance		400
Dec. 31	Unearned revenue	1,250
	Service revenue		1,250
Dec. 31	Interest expense	59
	Interest payable		59

 

Preparing Ledgers

Dr.	Cash	Cr.
Balance	$51,650	$5,772	Dec. 9
Dec. 21	4,400	2,660	Dec. 12
Dec. 31	6,435	550	Dec. 29
		$214	Dec. 30
		$175	Adj.
Balance	$53,114

 

Dr.	Merchandise Inventory	Cr.
Balance	$0
Dec. 2	4,000	$1,200	Dec.  7
Dec. 5	6,000	228	Dec. 9
Dec. 15	400	2,000	Dec. 11
		140	Dec. 12
		$2,022	Dec. 28
		$902	Adj.
Balance	$3,908

 

Dr.	Estimated returns Inventory	Cr.
Balance	$0
Adj.	540

 

Dr.	Prepaid Rent	Cr.
Balance	$3,000	$1,000	Adj.
Balance	$2,000

 

Dr.	Prepaid Insurance	Cr.
Balance	$4,400	$400	Adj.
Balance	$4,000

 

Dr.	Accumulated depreciation	Cr.
		$150	Balance
		150	Adj.
		$300	Balance

 

Dr.	Accounts payable	Cr.
Dec. 7	$1,200	$1,245	Balance
Dec. 9	6,000	4,000	Dec. 2
Dec. 12	$2,800	6,000	Dec. 5
Adj.	$175
		$1,070	Balance

 

Dr.	Salaries Payable	Cr.
		$0	Balance
		2,100	Adj.
		$2,100	Balance

 

Dr.	Interest Payable	Cr.
		$59	Balance
		59	Adj.
		$118	Balance

 

Dr.	Refund Payable	Cr.
		$0	Balance
		1,500
		$1,500	Balance

 

Dr.	Unearned Revenue	Cr.
Adj.	$1,250	$14,375	Balance
		$13,125	Balance

 

Dr.	Service Revenue	Cr.
		$0	Balance
		1,250	Adj.
		$1,250	Balance

 

Dr.	Sales Revenue	Cr.
		$0	Balance
Dec. 15	$1,100	5,500	Dec. 11
Adj.	1,500	6,435	Dec. 28
		$9,335	Balance

 

Dr.	Cost of goods sold	Cr.
Balance	$0	$400	Dec. 1
Dec. 11	2,000	$540	Adj.
Dec. 28	2,022
Adj.	902
Balance	$3,984

 

Dr.	Salaries Expense	Cr.
Balance	$0
Adj.	2,100
Balance	$2,100

 

Dr.	Depreciation Expense	Cr.
Balance	$0
	150
Balance	150

 

Dr.	Rent Expense	Cr.
Balance	$0
Adj.	1,000
Balance	$1,000

 

Dr.	Insurance Expense	Cr.
Balance	$0
Adj.	400
Balance	400

 

Dr.	Interest Expense	Cr.
Balance	$0
Adj.	59
Balance	$59

 

Preparing adjusted Trial balance

Canyon Canoe Company Adjusted Trial Balance December 31, 2018
	Debit ($)	Credit ($)
Cash	$53,114
Accounts receivable	4,000
Merchandise inventory	3,908
Estimated returns inventory	540
Cleaning supplies	50
Prepaid rent	2,000
Prepaid insurance	4,000
Equipment	5,400
Truck	3,000
Accumulated depreciation		300
Account payable		1,070
Salaries payable		2,1000
Interest payable		118
Refunds payable		1,500
Unearned revenue		13,125
Notes payable		36,000
H. capital		19,671
Income summary		0
H. withdrawal	0
Service revenue		1,250
Sales revenue		9,335
Cost of goods sold	3,984
Salaries expense	2,100
Sales commission expense	214
Utilities expense	550
Depreciation expense	150
Rent expense	1,000
Insurance expense	400
Interest expense	59
Total	$84,469	$84,469

Step 5: (4) Preparing an Income statement

Canyon Canoe Company Income Statement The year ended December 31, 2018
Revenues
Net sales revenue	$9,335
Service revenue	1,250
Total revenues	$10,585
Expenses
Cost of goods sold                                                              $3,984
Salaries expense                                                                  2,100
Sales commission expense                                                     214
Utility expense                                                                          550
Depreciation expense                                                              150
Rent expense                                                                        1,000
Insurance expense                                                                  400
Interest expense                                                                        59	8,457
Net income	$2,128

 

 

Canyon Canoe Company Statement of Owner’s Equity For the year ended December 31, 2018
H, Capital, December 01, 2018	$19,671
Owner’s contribution	0
Net income of the year	2,128
Total	$21,799
Owner’s withdrawal	0
H, capital, December 31, 2018	$21,799

 

Canyon Canoe Company Balance Sheet December 31, 2018
Assets:
Current asset                                                                    $53,114
Account receivable                                                               4,000
Merchandise inventory                                                      3,908
Estimated returns inventory                                                    540
Cleaning supplies                                                                     50
Prepaid rent                                                                          2,000
Prepaid insurance                                                                 4,000
Total current assets	$67,612
Property, plant, and equipment
Equipment                                                                            $5,400
Truck                                                                                      3,000
Accumulated depreciation                                                      (300)
Total property, plant, and equipment	8,100
Total assets	$75,712
Liabilities
Current liabilities:
Account payable                                                                    $1,070
Salaries payable                                                                      2,100
Interest payable                                                                          118
Refund payable                                                                        1,500
Unearned revenue                                                                  13,125
Total current liabilities	$17,913
Long-term liabilities:
Notes payable
Total long-term liabilities                                                  $36,000
Total liabilities	36,000
Owner’s Equity
Owner’s capital                                                                      $21,799
Total owner’s equity	21,799
Total liabilities & owner’s equity	$75,712

 

Step 6: (5) Computing the gross profit

Calculate the gross profit by deducting the cost of goods sold from the net sales revenue.

 $\begin{array}{rcl}\mathrm{Gross} \mathrm{Profit}& =& \mathrm{Net} \mathrm{sales} \mathrm{revenue}-\mathrm{Cost} \mathrm{of} \mathrm{goods} \mathrm{sold}\\ & =& \$10,435-\$4,444\\ & =& \$5,991\end{array}$

Calculate the gross profit percentage by dividing the gross profit by the net sales revenue.

 $\begin{array}{rcl}\mathrm{Gross} \mathrm{Profit} \mathrm{Percentage}& =& \frac{\mathrm{Gross} \mathrm{Profit}}{\mathrm{Net} \mathrm{Sales} \mathrm{Revenue}}\times 100\\ & =& \frac{\$5,991}{\$10,435}\times 100\\ & =& 57.41\%\end{array}$