On June 30, 2019, the balances of the accounts appearing in the ledger of Simkins Company are as follows:

On June 30, 2019, the balances of the accounts appearing in the ledger of Simkins Company are as follows:

Cash$   125,000 Purchases$4,100,000 Accounts Receivable 340,000 Purchases Returns and Allowances 32,000 Merchandise Inventory, July 1, 2018 415,000 Purchases Discounts 13,000 Estimated Returns Inventory 25,000 Freight In45,000 Office Supplies 9,000 Sales Salaries Expense 580,000 Prepaid Insurance 18,000 Advertising Expense 315,000 Land300,000 Delivery Expense18,000 Store Equipment 550,000 Depreciation Expense— Accumulated Depreciation— Store Equipment 12,000 Store Equipment 190,000 Miscellaneous Selling Expense 28,000 Office Equipment 250,000 Office Salaries Expense 375,000 Accumulated Depreciation— Rent Expense43,000 Office Equipment 110,000 Insurance Expense 17,000 Accounts Payable 85,000 Office Supplies Expense 5,000 Customer Refunds Payable 20,000 Depreciation Expense— Salaries Payable 9,000 Office Equipment 4,000 Unearned Rent 6,000 Miscellaneous Administrative Expense 16,000 Notes Payable 50,000 Rent Revenue32,500 Amy Gant, Capital 820,000 Interest Expense2,500 Amy Gant, Drawing 275,000 Sales6,590,000

Instructions

1. Does Simkins Company use a periodic or perpetual inventory system? Explain.

2. Prepare a multiple-step income statement for Simkins Company for the year ended June 30, 2019. The merchandise inventory as of June 30, 2019, was $508,000. The adjustment for estimated returns inventory for sales for the year ending December 31, 2019, was $33,000.

3. Prepare the closing entries for Simkins Company as of June 30, 2019.

4. What would the net income have been if the perpetual inventory system had been used?

Answer:

1. Simkins Company uses a periodic inventory system because it maintains 

accounts for purchases, purchases returns and allowances, purchases discounts, 

and freight in.

2.

Sales$6,590,000

Cost of merchandise sold:

Merchandise inventory, July 1, 2018$ 415,000

Cost of merchandise purchased:

Purchases$4,100,000

Purchases returns and allowances (32,000)

Purchases discounts(13,000)

Net purchases$4,055,000

Freight in45,000

Total cost of merchandise purchased 4,100,000

Merchandise available for sale$4,515,000

Merchandise inventory, June 30, 2019(508,000)

Cost of merchandise sold before estimated returns $4,007,000

Increase in estimated returns inventory(33,000)

Cost of merchandise sold3,974,000

Gross profit$2,616,000

Expenses:

Selling expenses:

Sales salaries expense $ 580,000

Advertising expense315,000

Delivery expense18,000

Depreciation expense—store equipment 12,000

Miscellaneous selling expense 28,000

Total selling expenses$ 953,000

Administrative expenses:

Office salaries expense $ 375,000

Rent expense43,000

Insurance expense17,000

Office supplies expense5,000

Depreciation expense—office equipment 4,000

Miscellaneous administrative expense 16,000

Total administrative expenses460,000

Total operating expenses1,413,000

Income from operations$1,203,000

Other revenue and expense:

Rent revenue$ 32,500

Interest expense(2,500) 30,000

Net income$1,233,000

3.

 June 30 Merchandise Inventory (June 30, 2019) 508,000

Estimated Returns Inventory 33,000

Sales6,590,000

Purchases Returns and Allowances 32,000

Purchases Discounts13,000

Rent Revenue32,500

Merchandise Inventory (July 1, 2018) 415,000

Purchases4,100,000

Freight In45,000

Sales Salaries Expense580,000

Advertising Expense315,000

Delivery Expense18,000

Depreciation Expense—Store Equipment 12,000

Miscellaneous Selling Expense28,000

Office Salaries Expense375,000

Rent Expense43,000

Insurance Expense17,000

Office Supplies Expense5,000

Depreciation Expense—Office Equipment 4,000

Interest Expense2,500

Miscellaneous Administrative Expense 16,000

Amy Gant, Capital1,233,000

Amy Gant, Capital275,000

Amy Gant, Drawing275,000

4. $1,233,000, the same net income as under the periodic inventory system