The following unadjusted trial balance is prepared at fiscal year-end for Nelson Company.
NELSON COMPANY
Unadjusted Trial Balance
January 31, 2013
Debit Credit
Cash $ 26,150
Merchandise inventory 14,500
Store supplies 5,000
Prepaid insurance 2,100
Store equipment 42,800
Accumulated depreciation—Store equipment $ 19,850
Accounts payable 12,000
J. Nelson, Capital
40,000
J. Nelson, Withdrawals 2,150
Sales
116,200
Sales discounts 2,000
Sales returns and allowances 2,250
Cost of goods sold 38,000
Depreciation expense—Store equipment 0
Salaries expense 30,700
Insurance expense 0
Rent expense 13,000
Store supplies expense 0
Advertising expense 9,400
Totals $ 188,050 $ 188,050
Rent expense and salaries expense are equally divided between selling activities and the general and administrative activities. Nelson Company uses a perpetual inventory system.
a. Store supplies still available at fiscal year-end amount to $1,700.
b. Expired insurance, an administrative expense, for the fiscal year is $1,750.
c. Depreciation expense on store equipment, a selling expense, is $1,600 for the fiscal year.
d.
To estimate shrinkage, a physical count of ending merchandise inventory is taken. It shows $10,300 of inventory is still available at fiscal year-end.
Answer:
a. To record the store supplies still available at fiscal year-end:
Debit Store Supplies Expense $1,700
Credit Store Supplies $1,700
b. To record the expired insurance:
Debit Insurance Expense $1,750
Credit Prepaid Insurance $1,750
c. To record the depreciation expense on store equipment:
Debit Depreciation Expense $1,600
Credit Accumulated Depreciation $1,600
d. To record the shrinkage of merchandise inventory:
Debit Cost of Goods Sold $3,200
Credit Merchandise Inventory $3,200
To adjust the trial balance, we need to make the following adjustments:
a. Store supplies still available at fiscal year-end amount to $1,700.
- Decrease Store supplies expense by $3,300 ($5,000 - $1,700).
- Increase Store supplies on the balance sheet by $1,700.
b. Expired insurance, an administrative expense, for the fiscal year is $1,750.
- Increase Insurance expense by $1,750.
c. Depreciation expense on store equipment, a selling expense, is $1,600 for the fiscal year.
- Increase Depreciation expense—Store equipment by $1,600.
d. To estimate shrinkage, a physical count of ending merchandise inventory is taken. It shows $10,300 of inventory is still available at fiscal year-end.
- Decrease Merchandise inventory by $4,200 ($14,500 - $10,300).
- Increase Cost of goods sold by $4,200.
After making these adjustments, the adjusted trial balance will look as follows:
NELSON COMPANY
Adjusted Trial Balance
January 31, 2013
Debit Credit
Cash $26,150
Merchandise inventory $10,300
Store supplies $1,700
Prepaid insurance $2,100
Store equipment $42,800
Accumulated depreciation—Store equipment $19,850
Accounts payable $12,000
J. Nelson, Capital
$40,000
J. Nelson, Withdrawals $2,150
Sales
$116,200
Sales discounts $2,000
Sales returns and allowances $2,250
Cost of goods sold $42,200
Depreciation expense—Store equipment $1,600
Salaries expense $15,350
Insurance expense $1,750
Rent expense $13,000
Store supplies expense $3,300
Advertising expense $9,400
Totals $179,350 $179,350
To answer the given questions, we need to adjust the trial balance to reflect the correct amounts for the store supplies, expired insurance, depreciation expense on store equipment, and the shrinkage in the merchandise inventory. Let's go through each adjustment step by step:
a. Store supplies still available at fiscal year-end amount to $1,700:
In the trial balance, store supplies are currently listed at $5,000. However, it is mentioned that $1,700 worth of store supplies are still available at the end of the fiscal year. To adjust for this, we need to subtract $1,700 from the store supplies account. Therefore:
Debit: Store Supplies = $5,000 - $1,700 = $3,300
Credit: No entry needed since this is just an adjustment to an existing account.
b. Expired insurance, an administrative expense, for the fiscal year is $1,750:
In the trial balance, prepaid insurance is currently listed at $2,100. It is mentioned that $1,750 worth of insurance has expired during the fiscal year. To adjust for this, we need to subtract $1,750 from the prepaid insurance account and recognize it as an expense. Therefore:
Debit: Insurance Expense = $1,750
Credit: Prepaid Insurance = $2,100 - $1,750 = $350
c. Depreciation expense on store equipment, a selling expense, is $1,600 for the fiscal year:
In the trial balance, there is no entry for depreciation expense on store equipment. To adjust for this, we need to recognize depreciation expense and reduce the value of the store equipment. Therefore:
Debit: Depreciation Expense—Store Equipment = $1,600
Credit: Accumulated Depreciation—Store Equipment = $1,600
d. Shrinkage in the merchandise inventory:
It is mentioned that the physical count of ending merchandise inventory reveals $10,300 worth of inventory still available at the end of the fiscal year. However, the trial balance lists merchandise inventory at $14,500. To adjust for this shrinkage, we need to reduce the merchandise inventory account accordingly. Therefore:
Debit: Cost of Goods Sold = $38,000 + ($14,500 - $10,300) = $42,200
Credit: Merchandise Inventory = $14,500 - ($14,500 - $10,300) = $10,300
After making these adjustments, the adjusted trial balance will reflect the correct amounts for store supplies, insurance expense, depreciation expense, and the shrinkage in merchandise inventory.