On June 30, 2019, the balances of the accounts appearing in the ledger of Simkins Company are as follows:
Cash$ 125,000 Purchases$4,100,000 Accounts Receivable 340,000 Purchases Returns and Allowances 32,000 Merchandise Inventory, July 1, 2018 415,000 Purchases Discounts 13,000 Estimated Returns Inventory 25,000 Freight In45,000 Office Supplies 9,000 Sales Salaries Expense 580,000 Prepaid Insurance 18,000 Advertising Expense 315,000 Land300,000 Delivery Expense18,000 Store Equipment 550,000 Depreciation Expense— Accumulated Depreciation— Store Equipment 12,000 Store Equipment 190,000 Miscellaneous Selling Expense 28,000 Office Equipment 250,000 Office Salaries Expense 375,000 Accumulated Depreciation— Rent Expense43,000 Office Equipment 110,000 Insurance Expense 17,000 Accounts Payable 85,000 Office Supplies Expense 5,000 Customer Refunds Payable 20,000 Depreciation Expense— Salaries Payable 9,000 Office Equipment 4,000 Unearned Rent 6,000 Miscellaneous Administrative Expense 16,000 Notes Payable 50,000 Rent Revenue32,500 Amy Gant, Capital 820,000 Interest Expense2,500 Amy Gant, Drawing 275,000 Sales6,590,000
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, 2019. The merchandise inventory as of June 30, 2019, was $508,000. The adjustment for estimated returns inventory for sales for the year ending December 31, 2019, was $33,000.
3. Prepare the closing entries for Simkins Company as of June 30, 2019.
4. What would the net income have been if the perpetual inventory system had been used?
Answer:
1. Simkins Company uses a periodic inventory system because it maintains
accounts for purchases, purchases returns and allowances, purchases discounts,
and freight in.
2.
Sales$6,590,000
Cost of merchandise sold:
Merchandise inventory, July 1, 2018$ 415,000
Cost of merchandise purchased:
Purchases$4,100,000
Purchases returns and allowances (32,000)
Purchases discounts(13,000)
Net purchases$4,055,000
Freight in45,000
Total cost of merchandise purchased 4,100,000
Merchandise available for sale$4,515,000
Merchandise inventory, June 30, 2019(508,000)
Cost of merchandise sold before estimated returns $4,007,000
Increase in estimated returns inventory(33,000)
Cost of merchandise sold3,974,000
Gross profit$2,616,000
Expenses:
Selling expenses:
Sales salaries expense $ 580,000
Advertising expense315,000
Delivery expense18,000
Depreciation expense—store equipment 12,000
Miscellaneous selling expense 28,000
Total selling expenses$ 953,000
Administrative expenses:
Office salaries expense $ 375,000
Rent expense43,000
Insurance expense17,000
Office supplies expense5,000
Depreciation expense—office equipment 4,000
Miscellaneous administrative expense 16,000
Total administrative expenses460,000
Total operating expenses1,413,000
Income from operations$1,203,000
Other revenue and expense:
Rent revenue$ 32,500
Interest expense(2,500) 30,000
Net income$1,233,000
3.
June 30 Merchandise Inventory (June 30, 2019) 508,000
Estimated Returns Inventory 33,000
Sales6,590,000
Purchases Returns and Allowances 32,000
Purchases Discounts13,000
Rent Revenue32,500
Merchandise Inventory (July 1, 2018) 415,000
Purchases4,100,000
Freight In45,000
Sales Salaries Expense580,000
Advertising Expense315,000
Delivery Expense18,000
Depreciation Expense—Store Equipment 12,000
Miscellaneous Selling Expense28,000
Office Salaries Expense375,000
Rent Expense43,000
Insurance Expense17,000
Office Supplies Expense5,000
Depreciation Expense—Office Equipment 4,000
Interest Expense2,500
Miscellaneous Administrative Expense 16,000
Amy Gant, Capital1,233,000
Amy Gant, Capital275,000
Amy Gant, Drawing275,000
4. $1,233,000, the same net income as under the periodic inventory system