Q32E Ocean Life Boat Supply uses the ... [FREE SOLUTION]

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鈥檚 net income or net loss?

Short Answer

Expert verified

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

Step by step solution

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.

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:

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

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

Computation of net income

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

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Short Answer

Step by step solution

Meaning of Net Income

Preparation of closing entries

Preparation of T-accounts

Computation of net income

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Particulars	Amounts ($)
Opening inventory	44,500
Add: Net purchases (WN-a)	170,900
Less: Closing inventory	(54,300)
Cost of goods sold	$161,100