The fiscal year-end unadjusted trial balance for Garcia Company is found on the trial balance tab. Rent expense and salaries expense are equally divided between selling activities and general and administrative activities. Garcia Company uses a perpetual inventory system. Descriptions of items that require adjusting entries on January 31, 2019, follow. 1. Store supplies still available at the fiscal year-end amount to $2,150.

2. Expired insurance, an administrative expense, for the fiscal year is $1,560.

3. Depreciation expense on store equipment, a selling expense, is $6,700 for the fiscal year.

4. To estimate shrinkage, a physical count of ending merchandise inventory is taken. It shows $10,150 of inventory is still available at fiscal year-end.

Compute the current ratio, acid-test ratio, and gross margin ratio as of January 31, 2017. (Round your answers to 2 decimal places.)

The following unadjusted trial balance is prepared at fiscal year-end for Garcia Company:

Cash$1,000  

Merchandise Inventory12,500  

Store supplies5,800

Prepaid Insurance2,400  

Store equipment42,900  

Accumulated depreciation - Store equipment  $15,250

Accounts payable  10,000

Common Stock  5,000

Retained Earnings  27,000

Dividends2,200  

Sales  111,950

Sales discounts2,000  

Sales returns and allowances2,200  

Cost of goods sold38,400  

Depreciation express - Store equipment0  

Salaries expense35,000  

Insurance expense0  

Rent expense15,000  

Store supplies expense0  

Advertising expense9,800  

Totals$169,200169,200

Garcia Company

Computation of:

a) Current Ratio = Current Assets/Current Liabilities = $14,140/$10,000 = 1.4

b) Acid- Test Ratio = (Current Assets - Inventory - Prepaid Insurance - Stores Supplies )/Current Liabilities = ($14,140 - 10,150 - 2,150 - 840)/$10,000 = 0.1

Here, we disregarded Inventory, Prepaid Insurance, and Stores Supplies from the current assets because they are difficult to recover in order to settle short-term debts.  So, only the Cash Balance was used for the calculation.

c) Gross Margin Ratio = Gross Profit/Net Sales x 100 = $69,350/$107,750 x 100 = 64.4%.

Explanation:

Adjusting Items:

a. Store Supplies:

Per Trial Balance $5,800

less year-end balance $2,150

Store Supplies Expense $3,650

b. Prepaid Insurance:

Per Trial Balance $2,400

less expired     $1,560

Insurance Expense $840 (Admin Expense)

c. Accumulated Depreciation:

Per Trial Balance $15,250

Depreciation Expense $6,700

Accumulated depreciation at year-end $21,950

d. Ending Inventory $10,150

e. Adjusted Trial Balance:

Cash                                                         $1,000  

Merchandise Inventory                                 12,500  

Store supplies                                           2,150

Prepaid Insurance                                             840  

Store equipment                                       42,900  

Accumulated depreciation - Store equipment  $21,950

Accounts payable                                                    10,000

Common Stock                                                     5,000

Retained Earnings                                                   27,000

Dividends                                                 2,200  

Sales                                                                   111,950

Sales discounts                                         2,000  

Sales returns and allowances                 2,200  

Cost of goods sold                               38,400  

Depreciation expense - Store equipment6,700  

Salaries expense                                      35,000  

Insurance expense                                 1,560  

Rent expense                                              15,000  

Store supplies expense                               3,650  

Advertising expense                               9,800  

Totals                                                 $175,900        175,900

f. Income Statement

Sales                               $111,950

Sales discounts                        (2,000)

Sales returns and allowances      (2,200)

Net Sales                                   $107,750

Cost of Goods Sold                      38,400

Gross Profit                                $69,350

Selling Expenses:

Depreciation                 $6,700

Salaries expense        17,500

Rent expense                 7,500  

Store supplies expense3,650  

Advertising expense      9,800  (45,150)

Administrative Expenses:

Insurance                      $1,560

Salaries expense        17,500

Rent expense                 7,500   (26,500)

Net Loss                                      ($2,360)

Inventory Shrinkage                   ($2,350)

Retained Earnings b/f                  27,000

Dividends                                      (2,200)

Retained Earnings c/f               $20,090

g) Balance Sheet

Assets:

Cash                                                  $1,000  

Merchandise Inventory                           10,150  

Store supplies                                    2,150

Prepaid Insurance                                      840          $14,140  

Store equipment                       42,900  

Accumulated depreciation         (21,950 )                  $20,950

Total Assets                                                               $35,090

Liabilities + Equity:

Accounts payable                                              $10,000

Common Stock                                                 5,000

Retained Earnings                                               20,090

Total Liabilities + Equity                                          $35,090

h) Current Ratio: According to investopedia.com, "The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year," showing investors and analysts how a company can maximize its current assets to meet its current debt and other payables.

i) Acid-test or quick ratio is the financial ratio that compares a company's most short-term assets to its most short-term liabilities to see if a company has enough cash to pay its immediate liabilities, such as short-term debts, disregarding difficult-to-liquidate current assets such as inventory.

j) The gross margin ratio represents a percentage of the gross profit over the net sales, multiplied by 100.  This ratio is also known as the gross profit margin or the gross profit percentage, or simply the gross margin.

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