Cash $ 125,000 Sales Discounts $ 66,000
Accounts Receivable 340,000 Purchases 4,100,000
Merchandise Inventory, July 1, 2013 415,000 Purchases Returns and Allowances 32,000
Office Supplies 9,000 Purchases Discounts 13,000
Prepaid Insurance 18,000 Freight In 45,000
Land 300,000 Sales Salaries Expense 580,000
Store Equipment 550,000 Advertising Expense 315,000
Accumulated Depreciation— Delivery Expense 18,000
Store Equipment 190,000 Depreciation Expense—
Office Equipment 250,000 Store Equipment 12,000
Accumulated Depreciation— Miscellaneous Selling Expense 28,000
Office Equipment 110,000 Office Salaries Expense 375,000
Accounts Payable 85,000 Rent Expense 43,000
Salaries Payable 9,000 Insurance Expense 17,000
Unearned Rent 6,000 Office Supplies Expense 5,000
Notes Payable 50,000 Depreciation Expense—
Amy Gant, Capital 825,000 Office Equipment 4,000
Amy Gant, Drawing 275,000 Miscellaneous Administrative Expense 16,000
Sales 6,748,000 Rent Revenue 32,500
Sales Returns and Allowances 92,000 Interest Expense 2,500
Instructions
1. Does Simkins Company use a periodic or perpetual inventory system? Explain.
2. Prepare a multiple-step income statement for Simkins Company for the year ended June 30, 2014. The merchandise inventory as of June 30, 2014, was $508,000.
3. Prepare the closing entries for Simkins Company as of June 30, 2014.
4. What would be the net income if the perpetual inventory system had been used?
Answer:
1. Periodic inventory system. Simkins Company uses a periodic inventory system since it maintains accounts for purchases, purchases returns and allowances, purchases discounts, and freight in.
2.
SIMKINS COMPANY
Income Statement
For the Year Ended June 30, 2014
Revenue from sales:
Sales $6,748,000
Less: Sales returns and allowances $ 92,000
Sales discounts 66,000 158,000
Net sales $6,590,000
Cost of merchandise sold:
Merchandise inventory, July 1, 2013 $ 415,000
Purchases $4,100,000
Less: Purchases returns and allowances 32,000
Purchases discounts 13,000
Net purchases $4,055,000
Add freight in 45,000
Cost of merchandise purchased 4,100,000
Cost of merchandise available for sale $4,515,000
Less merchandise inventory, 508,000
June 30, 2014
Cost of merchandise sold 4,007,000
Gross profit $2,583,000
Expenses:
Selling expenses:
Sales salaries expense $ 580,000
Advertising expense 315,000
Delivery expense 18,000
Depreciation expense—store equipment 12,000
Miscellaneous selling expense 28,000
Total selling expenses $ 953,000
Administrative expenses:
Office salaries expense $ 375,000
Rent expense 43,000
Insurance expense 17,000
Office supplies expense 5,000
Depreciation expense—office equipment 4,000
Miscellaneous administrative expense 16,000
Total administrative expenses 460,000
Total operating expenses 1,413,000
Income from operations $1,170,000
Other income and expense:
Rent revenue $ 32,500
Less interest expense 2,500 30,000
Net income $1,200,000
3.
Closing Entries
Merchandise Inventory 508,000
Sales 6,748,000
Purchases Returns and Allowances 32,000
Purchases Discounts 13,000
Rent Revenue 32,500
Income Summary 7,333,500
Income Summary 6,133,500
Merchandise Inventory 415,000
Sales Returns and Allowances 92,000
Sales Discounts 66,000
Purchases 4,100,000
Freight In 45,000
Sales Salaries Expense 580,000
Advertising Expense 315,000
Delivery Expense 18,000
Depreciation Expense—Store Equipment 12,000
Miscellaneous Selling Expense 28,000
Office Salaries Expense 375,000
Rent Expense 43,000
Insurance Expense 17,000
Office Supplies Expense 5,000
Depreciation Expense—Office Equipment 4,000
Miscellaneous Administrative Expense 16,000
Interest Expense 2,500
Income Summary 1,200,000
Amy Gant, Capital 1,200,000
Amy Gant, Capital 275,000
Amy Gant, Drawing 275,000
4. $1,200,000. The same net income as under the periodic inventory system.