Wiley Company’s income statement for Year 2 follows:Sales ........................................................... $150,000Cost of goods sold ...................................... 90,000Gross margin .............................................. 60,000Selling and administrative expenses ........... 40,000Income before taxes ................................... 20,000Income taxes ............................................... 8,000Net income .................................................. $ 12,000The company’s selling and administrative expense for Year 2 includes $7,500 of depreciation expense.Selected balance sheet accounts for Wiley at the end of Years 1 and 2 are as follows:Year 2 Year 1Debit Balance Accounts:Accounts receivable ..................................... $40,000 $30,000Inventory ...................................................... $54,000 $45,000Prepaid expenses ........................................ $8,000 $6,000Credit Balance Accounts:Accounts payable ......................................... $35,000 $28,000Accrued liabilities ......................................... $5,000 $8,000Income taxes payable .................................. $2,000 $2,500Deferred income taxes ................................. $6,000 $4,000Required:1. Using the direct method, convert the company’s income statement to a cash basis.2. Assume that during Year 2 Wiley had a $9,000 gain on sale of investments and a $3,000 loss on thesale of equipment. Explain how these two transactions would affect your computations in (1) above
Wiley Company’s income statement for Year 2 follows:
Sales ........................................................... $150,000
Cost of goods sold ...................................... 90,000
Gross margin .............................................. 60,000
Selling and administrative expenses ........... 40,000
Income before taxes ................................... 20,000
Income taxes ............................................... 8,000
Net income .................................................. $ 12,000
The company’s selling and administrative expense for Year 2 includes $7,500 of
Selected
Year 2 Year 1
Debit Balance Accounts:
Accounts receivable ..................................... $40,000 $30,000
Inventory ...................................................... $54,000 $45,000
Prepaid expenses ........................................ $8,000 $6,000
Credit Balance Accounts:
Accounts payable ......................................... $35,000 $28,000
Accrued liabilities ......................................... $5,000 $8,000
Income taxes payable .................................. $2,000 $2,500
Deferred income taxes ................................. $6,000 $4,000
Required:
1. Using the direct method, convert the company’s income statement to a cash basis.
2. Assume that during Year 2 Wiley had a $9,000 gain on sale of investments and a $3,000 loss on the
sale of equipment. Explain how these two transactions would affect your computations in (1) above
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