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Rowland & Sons Air Transport Service, Inc., has been in operation for three years. The following transactions occurred in February: Feb. 1 Paid $200 for rent of hangar space in February. Feb. 4 Received customer payment of $800 to ship several items to Philadelphia next month. Feb. 7 Flew cargo from Denver to Dallas; the customer paid in full ($900 cash). Feb. 10 Incurred and paid $1,200 in pilot wages for flying in February. Feb. 14 Paid $100 for an advertisement run in the local paper on February 14. Feb. 18 Flew cargo for two customers from Dallas to Albuquerque for $1,700; one customer paid $500 cash and the other asked to be billed $1,200. Feb. 25 Purchased on account $1,350 in supplies for future use on the planes. Required: Prepare accrual basis journal entries for each transaction. Calculate the company’s preliminary net income. Calculate the company’s net profit margin expressed as a percent.

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Answer:

Journal entries

Feb 01

Rent Expense                                           Debit               $ 200

Cash                                                          Credit                                   $ 200

Record payment of hanger rent for Feb

Feb 04

Cash                                                          Debit              $ 800

Unearned Revenue                                  Credit                                  $ 800

Recording of cash received in advance

Feb 7

Cash                                                           Debit             $ 900

Service Revenue                                       Credit                                $ 900

To record service revenue received in cash

Feb 10

Salaries and wages                                  Debit           $ 1,200

Cash                                                          Credit                                $ 1,200

To record salaries paid for services received in February

Feb 14

Advertisement expenses                         Debit          $    100

Cash                                                          Credit                               $    100

To record payment of advertisement expenses

Feb 18

Cash                                                          Debit            $ 500

Accounts Receivables                              Debit         $ 1,200

Service Revenue                                       Credit                             $ 1,700

To record services provided on cash and on credit

Feb 25

Supplies Inventory                                   Debit           $ 1,350

Accounts Payable                                    Credit                              $ 1,350

Recording of purchase of supplies for future use on credit

The preliminary net income for February is $ 1,100

The net profit margin is  42.3 %

Explanation:

Computation of net income and net profit margin

Revenues   ( $   900 + $ 1,700 )                                                     $ 2,600    

Expenses ($ 200 + $ 1,200 + $ 100 )                                             $ 1,500

Net Income                                                                                      $ 1,100    

Net profit margin = Net income / Revenues

Net Profit margin   = $ 1,100/ $ 2,600 =                                          42.3 %  

The other entries for collections made on Feb 04 for services to be performed next month and the purchase of supplies to be used in the future are not to be considered in revenues and expenses as they do not pertain to the current month                                                                                                                  

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