Chapter 1, Problem 23PSA

a.

To determine

The balance sheet and income statement of Company N for 2 options

Answer to Problem 23PSA

Option 1

Calculation of income statement of Company N is as follows:

Table (1)

Calculation of balance sheet of Company N is as follows:

Table (2)

Option 2

Calculation of income statement of Company N is as follows:

Table (3)

Calculation of balance sheet of Company N is as follows:

Table (4)

Explanation of Solution

Income statement:

It is the financial statement of a company that shows all the revenues earned and expenses incurred by the company over a period of time.

Balance sheet:

It is one of the financial statements that summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Working notes:

Calculate the sale revenue:

$\begin{array}{c}\text{Sales revenue}=\text{Number of units sold}\times \text{Price of each }\\ =3,000\text{ units}\times \$30\\ =\$90,000\end{array}$

Hence, the sales revenue is $90,000.

…… (1)

Calculate the cost per unit:

$\begin{array}{c}\text{Cost per unit}=\frac{\text{Materials}+\text{Labor}+\text{Overheads }}{\text{Total number of units produced}}\\ =\frac{\$30,000}{4,000\text{ units}}\\ =\$7.5\end{array}$

Hence, the cost per unit is $7.5.

Calculate the cost of goods sold:

$\begin{array}{c}\text{Cost of goods sold}=\text{Cost per unit}\times \text{Number of goods sold}\\ =\$7.5\times 3,000\text{ units}\\ =\$22,500\end{array}$

Hence, the cost of goods sold is $22,500.

…… (2)

Calculate the total cash:

$\begin{array}{c}\text{Total cash}=\text{Acquired capital}+\text{Sales revenue}-\text{Product cost}-\text{Planning cost}\\ =\$50,000+\$90,000-\$30,000-\$24,000\\ =\$140,000-\$54,000\\ =\$86,000\end{array}$

Hence, the total cash is $86,000.

…… (3)

Calculate the total finished goods:

$\begin{array}{c}\text{Finished goods}=\text{Cost per unit}\times \text{Completed goods}-\text{Number of goods sold}\\ =\$7.5\times 4,000\text{ units}-3,000\text{ units}\\ =\$7.5\times 1,000\text{ units}\\ =\$7,500\end{array}$

Hence, the finished goods is $7,500.

…… (4)

Calculate the cost per unit:

$\begin{array}{c}\text{Cost per unit}=\frac{\text{Materials}+\text{Labor}+\text{Overheads}+\text{Planning cost }}{\text{Total number of units produced}}\\ =\frac{\$30,000+\$24,000}{4,000\text{ units}}\\ =\frac{\$54,000}{4,000\text{ units}}\\ =\$13.5\end{array}$

Hence, the cost per unit is $13.5.

Calculate the cost of goods sold:

$\begin{array}{c}\text{Cost of goods sold}=\text{Cost per unit}\times \text{Number of goods sold}\\ =\$13.5\times 3,000\text{ units}\\ =\$40,500\end{array}$

Hence, the cost of goods sold is $40,500.

…… (5)

Calculate the total finished goods:

$\begin{array}{c}\text{Finished goods}=\text{Cost per unit}\times \left(\text{Completed goods}-\text{Number of goods sold}\right)\\ =\$13.5\times \left(5,000\text{ units}-4,000\text{ units}\right)\\ =\$13.5\times 1,000\text{ units}\\ =\$13,500\end{array}$

Hence, the finished goods are $13,500.

…… (6)

b.

To determine

Recognize the option in the financial statement that gives a favourable image to the creditors and investors.

Answer to Problem 23PSA

Option 2 is the financial statements that give favourable impression to creditors and investors with greater net income of $6,000 than option 1 net income.

Explanation of Solution

Income statement:

Income statement is the financial statement of a company that shows all the revenues earned and expenses incurred by the company over a period of time.

Balance sheet:

Balance Sheet is one of the financial statements that summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

The option that gives the favorable image to the creditors and investors is as follows:

Option 2 gives the in the financial statement that gives the favorable image to the creditors and investors because the net income in option 2 is greater than the net income in option 1.

c.

To determine

Calculate the amount of bonus under each option and recognize the option that provides the higher bonus.

Answer to Problem 23PSA

Option 2 provides the president with the higher bonus with $12,375.

Explanation of Solution

Income statement:

Income statement is the financial statement of a company that shows all the revenues earned and expenses incurred by the company over a period of time.

Balance sheet:

Balance Sheet is one of the financial statements that summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Calculation of bonus under option 1 is as follows:

$\begin{array}{c}\text{Bonus}=\text{Net income (option 1)}\times 25\%\text{ on net income}\\ =\$43,500\times 25\%\\ =\$10,875\end{array}$

Hence, the bonus received by president under option 1 is $10,875.

Calculation of bonus under option 2 is as follows:

$\begin{array}{c}\text{Bonus}=\text{Net income (option 2)}\times 20\%\text{ on net income}\\ =\$49,500\times 25\%\\ =\$12,375\end{array}$

Hence, the bonus received by president under option 2 is $12,375.

d.

To determine

Calculate the amount of tax expenses rate under each option and recognize which option can reduce the income tax expenses of the company.

Answer to Problem 23PSA

Option 1 minimizes the cost of income tax expenses of the company by $15,225.

Explanation of Solution

Calculation of income tax under option 1 is as follows:

$\begin{array}{c}\text{Bonus}=\text{Net income (option 1)}\times 35\%\text{ income tax rate}\\ =\$43,500\times 35\%\\ =\$15,225\end{array}$

Hence, the income tax expenses under option 1 are $15,225.

Calculation of income tax under option 2 is as follows:

$\begin{array}{c}\text{Bonus}=\text{Net income (option 2)}\times 35\%\text{ income tax rate}\\ =\$49,500\times 35\%\\ =\$17,325\end{array}$

Hence, the bonus received by president under option 2 is $17,325

e.

To determine

Comment on the conflict between the company president and the owner based on the requirement c and requirement d and define an incentive compensation plan that would avoid the conflict.

Explanation of Solution

The conflicts between the owner and the president are as follows:

Option 2 provides the president with the higher bonus with $12,375. Option 1 minimizes the cost of income tax expenses for the company by $15,225. These are the two conflicts between the owner and the president.

The reasons to avoid these conflicts are as follows:

• The bonus plans of the company can be tied up with the company stock price instead of net income.
• Market efficiency increases, as a result the performance of the company increases that creates a value to the company stock price.