You have been provided with the following selected accounts for Severn Limited for the year ended June 30, 2018:
Inventory, July 1, 2017.......................................$520,000
Purchases............................................................6,280,000
Accounts receivable..............................................660,000
Sales...................................................................7,800,000
Purchase returns and allowances..........................240,000
Freight in................................................................80,000
Administrative expenses.......................................740,000
Land...................................................................1,400,000
Sales discounts......................................................100,000
Interest expense....................................................$20,000
Interest revenue......................................................40,000
Accounts payable..................................................540,000
Selling expenses....................................................120,000
Cash......................................................................500,000
Common shares.....................................................300,000
Severn conducted a physical inventory count on June 30, 2018. Inventory on hand at that date was determined to be $600,000.
Instructions
(a) Prepare a partial multiple-step income statement for the year ended June 30, 2018, through to gross profit.
(b) Prepare the period-end adjusting journal entry to update the Cost of Goods Sold and Merchandise Inventory accounts.
(c) Calculate the gross profit margin. If the industry average gross profit margin is 26%, how does Severn's gross profit margin compare?