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Chapter 5: Q32E (page 305)

Ocean Life Boat Supply uses the periodic inventory method. The adjusted trial balance of Ocean Life Boat Supply at December 31, 2018, follows:

Requirements

1. Journalize the required closing entries at December 31, 2018. Assume ending Merchandise Inventory is $54,300.

2. Set up T-accounts for Income Summary; Retained Earnings; and Dividends. Post the closing entries to the T-accounts, and calculate their ending balances.

3. How much was Ocean Life’s net income or net loss?

Short Answer

Expert verified

The net income of the company is$97,600.

Step by step solution

01

Meaning of Net Income

In accounting, net income refers to the amount of profit left with the company after the settlement all operating and non-operating expenses and applicable income taxes. Net income is computed with the help of a report called an income statement.

02

Preparation of closing entries

Date

Accounts and Explanation

Debit ($)

Credit ($)

2018

Dec 31

Sales revenue

315,800

Interest revenue

3,400

Income summary

319,200

(To close the revenue accounts)

Dec 31

Income summary

221,600

Cost of goods sold (WN-1)

161,100

Selling expenses

38,600

Administrative expenses

21,900

(To close the expenses accounts)

Dec 31

Income summary (319200-221600)

97,600

Retained Earnings

97,600

(To close income summary account)

Dec 31

Retained earnings

60,600

Dividends

60,600

(To close the dividend account)

Working Notes:

  1. Computation of Cost of goods sold:

    Particulars

    Amounts ($)

    Opening inventory

    44,500

    Add: Net purchases (WN-a)

    170,900

    Less: Closing inventory

    (54,300)

    Cost of goods sold

    $161,100


(a) Computation of Net purchases:

Particulars

Amounts ($)

Purchases

274,500

Less: Returns and allowances

(94,600)

Less: Purchase discounts

(9,000)

Net purchases

$170,900

03

Preparation of T-accounts

Income Summary

Date

Particulars

Amount ($)

Date

Particulars

Amount ($)

2018

2018

Dec 31

Expenses

221,600

Dec 31

Revenues

319,200

Retained earnings

97,600

Dec 31

Ending balance

0

Retained Earnings

Date

Particulars

Amount ($)

Date

Particulars

Amount ($)

2018

2018

Dec 31

Dividends

60,600

Dec 31

Beginning balance

34,100

Ending balance

71,100

Dec 31

Income summary

97,600

Dividends

Date

Particulars

Amount ($)

Date

Particulars

Amount ($)

2018

2018

Dec 31

Beginning balance

60,600

Dec 31

Retained earnings

60,600

Retained earnings

97,600

Dec 31

Ending balance

0

04

Computation of net income

Net Income=Revenues-Expenses=$319,200-$221,600=$97,600

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Most popular questions from this chapter

Journalize the following transactions for Soul Art Gift Shop. Explanations are not required.

Feb. 3 Purchased \(3,300 of merchandise inventory under terms 3/10, n/EOM, and FOB shipping point.

7 Returned \)900 of defective merchandise purchased on February 3.

9 Paid freight bill of \(400 on February 3 purchase.

10 Sold merchandise inventory on account for \)4,700. Payment terms were 2/15, n/30. These goods cost the company $2,350.

12 Paid amount owed on credit purchase of February 3, less the return and the discount.

28 Received cash from February 10 customer in full settlement of their debt.

Rae Philippe was a warehouse manager for Atkins Oilfield Supply, a business that operated across eight Western states. She was an old pro and had known most of the other warehouse managers for many years. Around December each year, auditors would come to do a physical count of the inventory at each warehouse. Recently, Rae’s brother started his own drilling company and persuaded Rae to “loan” him 80 joints of 5-inch drill pipe to use for his first well. He promised to have it back to Rae by December, but the well encountered problems and the pipe was still in the ground. Rae knew the auditors were on the way, so she called her friend Andy, who ran another Atkins warehouse. “Send me over 80 joints of 5-inch pipe tomorrow, and I’ll get them back to you ASAP,” said Rae. When the auditors came, all the pipe on the books was accounted for, and they filed a “no-exception” report.

Requirements

1. Is there anything the company or the auditors could do in the future to detect this kind of fraudulent practice?

2. How would this kind of action affect the financial performance of the company?

When granting a sales allowance is there a return of merchandise inventory from the customer? Describe the journal entry(ies) that would be recorded.

Rae Philippe was a warehouse manager for Atkins Oilfield Supply, a business that operated across eight Western states. She was an old pro and had known most of the other warehouse managers for many years. Around December each year, auditors would come to do a physical count of the inventory at each warehouse. Recently, Rae’s brother started his own drilling company and persuaded Rae to “loan” him 80 joints of 5-inch drill pipe to use for his first well. He promised to have it back to Rae by December, but the well encountered problems and the pipe was still in the ground. Rae knew the auditors were on the way, so she called her friend Andy, who ran another Atkins warehouse. “Send me over 80 joints of 5-inch pipe tomorrow, and I’ll get them back to you ASAP,” said Rae. When the auditors came, all the pipe on the books was accounted for, and they filed a “no-exception” report.

Requirements

1. Is there anything the company or the auditors could do in the future to detect this kind of fraudulent practice?

2. How would this kind of action affect the financial performance of the company?

Journalize the following sales transactions for King Company. Explanations are not required.

Apr. 1 King Company sold merchandise inventory for \(150. The cost of the inventory was \)90. The customer paid cash. King Company was running a promotion and the customer received a \(20 award at the time of sale that can be used at a future date on any King Company merchandise.

May 15 The customer uses the \)20 award when purchasing merchandise inventory for \(30. The cost of the inventory was \)18. The customer paid cash.
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