Multi-Step Income Statement And Adjusting Entries

Multi Step Income Statement And Adjusting Entries The Boston Trading

The Boston Trading company's accounting year ends on December 31, and it has provided its initial ledger balances along with additional data related to adjustments necessary for accurate financial reporting. The primary task involves recording the appropriate adjusting entries at year-end and preparing a multi-step income statement that clearly delineates operating from non-operating activities, consolidates expenses, and reflects the true financial position of the company for the year.

Initially, it is essential to recognize that the company's ledger balances reflect the transactions recorded throughout the year but do not account for necessary adjustments for accrued expenses, depreciation, and prepayments. These adjustments ensure that financial statements present an accurate picture of the company's financial health by matching expenses to revenues properly.

Adjusting Entries at December 31

To ensure proper alignment with accounting principles such as matching and accrual accounting, the following adjusting entries are necessary based on the given data:

1. Prepaid Insurance Adjustment

The prepaid insurance balance as of December 31 is $1,200. Since the original balance was $6,000, and the current balance reflects the remaining prepaid amount, the insurance expense is the difference: ($6,000 - $1,200) = $4,800. Therefore, the adjusting entry is:

Debit Insurance Expense $4,800
Credit Prepaid Insurance $4,800

2. Depreciation on Furniture and Fixtures

The annual depreciation expense for furniture and fixtures is $1,800. The adjustment involves recording this expense and updating accumulated depreciation accordingly:

Debit Depreciation Expense - Furniture and Fixtures $1,800
Credit Accumulated Depreciation - Furniture and Fixtures $1,800

3. Depreciation on Delivery Equipment

The annual depreciation expense on delivery equipment is $13,000, which must be recognized accordingly:

Debit Delivery Equipment Depreciation Expense $13,000
Credit Accumulated Depreciation - Delivery Equipment $13,000

4. Salaries Payable Adjustment

The salaries payable at December 31 amount to $3,000 ($1,800 sales-related and $1,200 office-related). If these salaries were accrued but not recorded, the adjusting journal entry is:

Debit Salaries Expense $3,000
Credit Salaries Payable $3,000

5. Office Supplies Adjustment

Unused office supplies as of December 31 are valued at $1,000. To recognize supplies expense for supplies used during the year, we need to determine the supplies used:

• Initial office supplies balance: $4,200
• Remaining supplies: $1,000
• Supplies used: $4,200 - $1,000 = $3,200

Adjusting entry:

Debit Office Supplies Expense $3,200
Credit Office Supplies $3,200

Preparation of the Multi-Step Income Statement

Step 1: Calculate Gross Profit

Sales Revenue: $630,000

Less: Cost of Goods Sold: $404,000

Gross Profit: $226,000

Step 2: Operating Expenses

Operating expenses include utilities, sales salaries, delivery expenses, advertising, rent, office salaries, depreciation, and supplies expenses. All operating expenses are combined into a single line for selling, general, and administrative expenses (SG&A):

• Utilities Expense: $4,800
• Sales Salaries Expense: $82,000
• Delivery Expense: $10,800
• Advertising Expense: $5,500
• Rent Expense: $14,400
• Office Salaries Expense: $56,000
• Depreciation Expense - Furniture and Fixtures: $1,800
• Depreciation Expense - Delivery Equipment: $13,000
• Salaries Expense (accrued): $3,000
• Office Supplies Expense: $3,200
• Utilities, salaries, supplies, and depreciation are combined into total operating expenses.

Total Operating Expenses = $4,800 + $82,000 + $10,800 + $5,500 + $14,400 + $56,000 + $1,800 + $13,000 + $3,000 + $3,200 = $193,700

Step 3: Operating Income

Operating Income = Gross Profit - Operating Expenses = $226,000 - $193,700 = $32,300

Step 4: Other Income and Expenses

Since there are no other income or expenses provided, we proceed to calculate income before taxes.

Income before Income Tax = Operating Income = $32,300

Step 5: Income Tax Expense

Income tax expense is $9,000, reducing the net income.

Net Income = Income before Taxes - Income Tax Expense = $32,300 - $9,000 = $23,300

Final Multi-Step Income Statement for the Year

Conclusion

The adjustments ensure that the financial statements reflect accurate expenses and depreciation for the year, leading to a valid representation of Boston Trading's financial performance. The multi-step income statement provides a detailed view of profitability, emphasizing gross profit, operating income, and net income, giving stakeholders a clear understanding of how the company generated its earnings during the period.

References

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