Chapter 1, Problem 23PSB

a.

To determine

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

Answer to Problem 23PSB

Option 1

Calculation of income statement of Company H is as follows:

Table (1)

Calculation of balance sheet of Company H is as follows:

Table (2)

Option 2

Calculation of income statement of Company H is as follows:

Table (3)

Calculation of balance sheet of Company H 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:

$\begin{array}{c}\text{Sales revenue}=\text{Number of units sold}\times \text{Price of each }\\ =8,000\text{ units}\times \$15\\ =\$120,000\end{array}$

Hence, the sales revenue is $120,000.

…… (1)

Calculate the cost per unit:

$\begin{array}{c}\text{Cost per unit}=\frac{\text{Materials}+\text{Labor}+\text{Overheads }}{\text{Total number of units produced}}\\ =\frac{\$60,000}{10,000\text{ units}}\\ =\$6\end{array}$

Hence, the cost per unit is $6.

Calculate the cost of goods sold:

$\begin{array}{c}\text{Cost of goods sold}=\text{Cost per unit}\times \text{Number of goods sold}\\ =\$6\times 8,000\text{ units}\\ =\$48,000\end{array}$

Hence, the cost of goods sold is $48,000.

…… (2)

Calculate the total cash:

$\begin{array}{c}\text{Total cash}=\text{Acquired capital}+\text{Sales revenu}-\text{Product cost}-\text{development cost}\\ =\$86,000+\$120,000-\$60,000-25,000\\ =\$206,000-85,000\\ =\$121,000\end{array}$

Hence, the total cash is $121,000.

…… (3)

Calculate the total finished goods:

$\begin{array}{c}\text{Finished goods}=\text{Cost per unit}\times \text{Completed goods}-\text{Number of goods sold}\\ =\$6\times \left(10,000\text{ units}-8,000\text{ units}\right)\\ =\$6\times 2,000\text{ units}\\ =\$12,000\end{array}$

Hence, the finished goods is $12,000.

…… (4)

Calculate the cost per unit:

$\begin{array}{c}\text{Cost per unit}=\frac{\text{Materials}+\text{Labor}+\text{Overheads}+\text{Development cost }}{\text{Total number of units produced}}\\ =\frac{\$60,000+\$25,000}{10,000\text{ units}}\\ =\frac{\$85,000}{10,000\text{ units}}\\ =\$8.5\end{array}$

Hence, the cost per unit is $8.5.

Calculate the cost of goods sold:

$\begin{array}{c}\text{Cost of goods sold}=\text{Cost per unit}\times \text{Number of goods sold}\\ =\$8.5\times 8,000\text{ units}\\ =\$68,000\end{array}$

Hence, the cost of goods sold is $68,000.

…… (5)

Calculate the total finished goods:

$\begin{array}{c}\text{Finished goods}=\text{Cost per unit}\times \text{Completed goods}-\text{Number of goods sold}\\ =\$8.5\times \left(10,000\text{ units}-8,000\text{ units}\right)\\ =\$8.5\times 2,000\text{ units}\\ =\$17,000\end{array}$

Hence, the finished goods is $17,000.

…… (6)

b.

To determine

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

Answer to Problem 23PSB

Option 2 is the financial statement that gives favourable impression to creditors and investors with greater net income of $52,000.

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.

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 23PSB

Option 2 provides the president with the higher bonus with $5,200.

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:

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:

$\begin{array}{c}\text{Bonus}=\text{Net income}\times 10\%\text{ on net income}\\ =\$47,000\times 10\%\\ =\$4,700\end{array}$

Hence, the bonus received by president under option 1 is $4,700.

Calculation of bonus under option 2 is as follows:

$\begin{array}{c}\text{Bonus}=\text{Net income}\times 10\%\text{ on net income}\\ =\$52,000\times 10\%\\ =\$5,200\end{array}$

Hence, the bonus received by president under option is $5,200.

d.

To determine

Calculate the amount of tax expenses under each option and recognize which option pays lesser tax.

Answer to Problem 23PSB

Option 1 minimizes the cost of income tax expenses for the company by $16,450.

Explanation of Solution

Calculation of income tax under option 1 is as follows:

$\begin{array}{c}\text{Bonus}=\text{Net income}\times 35\%\text{ income tax rate}\\ =\$47,000\times 35\%\\ =\$16,450\end{array}$

Hence, the income tax expenses under option 1 is $16,450.

Calculation of income tax under option 2 is as follows:

$\begin{array}{c}\text{Bonus}=\text{Net income}\times 35\%\text{ income tax rate}\\ =\$52,000\times 35\%\\ =\$18,200\end{array}$

Hence, the bonus received by president under option 2 is $18,200

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 is as follows:

Option 2 provides the president with the higher bonus with $5,200. Option 1 minimizes the cost of income tax expenses for the company by $16,450. These are the two conflicts between the owner and the president.

The reasons to avoid these conflicts is 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.