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a.
The
a.
Answer to Problem 27PSA
Option 1
Calculation of income statement of Company CM is as follows:
Table (1)
Hence, the net income of Company CM is $20,000.
Calculation of balance sheet of Company CM is as follows:
Table (2)
Option 2
Calculation of income statement of Company CM is as follows:
Table (3)
Hence, the net income of Company CM is $32,000.
Calculation of balance sheet of Company CM is as follows:
Table (4)
Explanation of Solution
Income statement:
It is the financial statement of a company that shows all the incomes earned and expenditures incurred by the company for a particular period of time.
Balance sheet:
Balance sheet is one of the financial statements that summarizes 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:
Hence, the sales revenue is $140,000.
(1)
Calculate the cost per unit:
Hence, the cost per unit is $15.
Calculate the cost of goods sold:
Hence, the cost of goods sold is $60,000.
(2)
Calculate the total cash:
Hence, the total cash is $85,000.
(3)
Calculate the total finished goods:
Hence, the finished goods is $15,000.
(4)
Calculate the cost per unit:
Hence, the cost per unit is $27.
Calculate the cost of goods sold:
Hence, the cost of goods sold is $108,000.
(5)
Calculate the total finished goods:
Hence, the finished goods is $27,000.
(6)
b.
The option in the financial statement that gives a favourable image to the creditors and investors.
b.
Answer to Problem 27PSA
Option 2 is the financial statement that gives a favorable impression to creditors and investors with a greater net income of $12,000 than option 1’s net income.
Explanation of Solution
Income statement:
Income statement is the financial statement of a company that shows all the incomes gained and expenditures incurred by the company for a time period.
Balance sheet:
Balance sheet is one of the financial statements that summarizes 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 provides the financial statement that gives a favorable image to the creditors and investors because the net income in option 2 is greater than the net income in option 1.
c.
The amount of bonus under each option and recognize the option that provides a higher bonus.
c.
Answer to Problem 27PSA
Option 2 provides the president with a higher bonus of $6,400.
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 summarizes 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:
Hence, the bonus received by the president under option 1 is $4,000.
Calculation of bonus under option 2 is as follows:
Hence, the bonus received by the president under option 2 is $6,400.
d.
The amount of tax rate under each option and recognize which option pays less tax.
d.
Answer to Problem 27PSA
Option 1 minimizes the cost of income tax expenses for the company by $6,000.
Explanation of Solution
Calculation of income tax under option 1 is as follows:
Hence, the income tax expenses under option 1 is $6,000.
Calculation of income tax under option 2 is as follows:
Hence, the bonus received by the president under option 2 is $9,600
e.
Comment on the conflict among the company’s president as determined in requirement c and the owner-based requirement d, and define an incentive compensation plan that will neglect the conflict.
e.
Explanation of Solution
The conflicts between the owner and the president are as follows:
Option 2 provides the president with a higher bonus of $6,400. Option 1 minimizes the cost of income tax expenses for the company by $6,000. 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’s stock price, instead of net income.
Market efficiency increases; as a result, the performance of the company increases, which creates a value to the company’s stock price.
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Chapter 1 Solutions
Fundamental Managerial Accounting Concepts
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