Chapter 13, Problem 7BP

To determine

Compute the missing amounts, and complete the financial statements of Company T.

Explanation of Solution

Prepare income statement of Company T as follows:

Company T
Income Statement
For the Year Ended December 31, 2012
Particulars	Amount
Sales revenue	$936,000
Less: Cost of Goods sold	$655,200
Gross profit	$280,800
Less: Selling and administrative expenses	$158,400
Income before interest expense and income taxes	$122,400
Less: Interest expense	$14,400
Income before income taxes	$108,000
Less: Income tax expense (30%)	$37,800
Net income	$70,200

Table (1)

Working notes:

 Calculate sales revenue.

$\begin{array}{c}\text{Sales revenue = }\frac{\text{Net income}}{\text{Return on sales}}\\ =\frac{\$70,200}{7.5\%}\\ =\$936,000\end{array}$ (1)

Calculate gross profit.

$\begin{array}{c}\text{Gross profit = Sales revenue }\times \text{Gross profit percentage}\\ \text{=}\text{\$936,000}\times 30\text{\%}\\ \text{=}\text{\$280,800}\end{array}$ (2)

Calculate cost of goods sold.

$\begin{array}{c}\text{Cost of goods sold = Sales revenue }-\text{Gross profit}\\ \text{=}\text{\$936,000}-\$280,800\\ =\$655,200\end{array}$ (3)

Calculate income before income taxes.

$\begin{array}{c}\text{Income before income taxes = Net income }\times \frac{1}{0.65}\\ =\$70,200\times \frac{1}{0.65}\\ =\$108,000\end{array}$ (4)

Calculate Income tax expense.

$\begin{array}{c}\text{Income tax expense = Income before income taxes }\times \text{Income tax percent}\\ \text{= \$108,000}\times \text{35\%}\\ \text{= \$37,800}\end{array}$ (5)

Calculate Income before interest expense and income taxes.

$\begin{array}{c}\begin{array}{l}\text{Income before interest }\\ \text{expense and income taxes}\end{array})\text{ = Income before income taxes + Interest expenses}\\ \text{= \$122,400}\text{+\$14,400}\\ \text{= \$136,800}\end{array}$ (6)

Calculate Selling and administrative expenses.

$\begin{array}{c}\begin{array}{l}\text{Selling and }\\ \text{administrative expenses}\end{array})\text{ = }\left(\begin{array}{l}\text{Gross profit }-\text{Income before }\\ \text{interest expense and income taxes}\end{array}\right)\\ =\$280,800-\$122,400\\ =\$158,400\end{array}$ (7)

Calculate interest expense.

$\begin{array}{c}\text{Bonds payable = Bonds payable }\times \text{Interest rate}\\ =\$144,000\times 10\%\\ =\$14,400\end{array}$ (8)

Prepare Balance sheet of Company T as follows:

Company T
Balance Sheet
December 31, 2012
Cash	$43,650	Current liabilities	$81,000
Accounts Receivable	$90,000	10% Bonds payable	$144,000
Inventory	$121,500	Common stock	$303,000
Equipment (net)	$320,850	Retained earnings	$48,000
Total Assets	$576,000	Total liabilities and Stockholders' equity	$576,000

Table (2)

Working notes:

Calculate accounts receivable.

$\begin{array}{c}\text{Accounts receivable turnover = }\frac{\text{Sales revenue}}{\text{Average accounts receivable}}\\ 10=\frac{\$936,000}{\left(\$97,200+x\right)÷2}\\ 10\times \left(\$97,200+x\right)÷2=\$936,000\\ \left(\$97,200+x\right)÷2=\frac{\$936,000}{10}\end{array}$

$\begin{array}{c}\left(\$97,200+x\right)÷2=\$93,600\\ \left(\$97,200+x\right)=\$93,600\times 2\\ x=\$187,200-\$97,200\\ x=\$90,000\end{array}$

Hint: ‘x’ denotes ending accounts receivable.

(9)

Calculate total current assets.

$\begin{array}{c}\text{Current ratio}\text{=}\frac{\text{Current assets}}{\text{Current liabilites}}\\ \text{Current assets}=\$81,000\times 3.15\\ \text{Current assets =\$255,150}\end{array}$

Calculate inventory.

$\begin{array}{c}\text{Quick ratio = }\frac{\text{Current assets }-\text{Inventory}}{\text{Current liabilites}}\\ 1.65=\frac{\$255,150-x}{\$81,000}\\ 1.65\times \$81,000=\$255,150-x\\ \$133,650=\$255,150-x\end{array}$

$\begin{array}{c}x=\$255,150-\$133,650\\ x=\$121,500\end{array}$

Hint ‘x’ denotes ending inventory.

(10)

Calculate cash (Bank overdraft).

$\begin{array}{c}\text{Cash = Current assets }-\text{Accounts receivable + Inventory}\\ \text{=\$255,150}-\left(\$90,000+\$121,500\right)\\ =\$43,650\end{array}$

Hint ‘x’ denotes cash.

(11)

Calculate equipment.

$\begin{array}{c}\text{Equipment = Total assets }-\left(\text{Cash + Accounts receivable + Inventory}\right)\\ =\$576,000-\left(\$43,650+\$90,000+\$121,500\right)\\ =\$320,850\end{array}$ (12)

Calculate common stock.

$\begin{array}{c}\text{Return on common stockholders' equity}\text{=}\frac{\text{Net income}}{\text{ stockholders' equity}}\\ 20\%=\frac{\$70,200}{x}\\ x=\frac{\$70,200}{20\%}\\ x=\$351,000\end{array}$

$\begin{array}{c}\text{Common stock = Total stockholders' equity + Retained earnings}\\ =\text{}\$351,000-\$48,000\\ =\$303,000\end{array}$ (13)

Calculate current liabilities.

$\begin{array}{c}\text{Current liabilites =}\left(\begin{array}{l}\text{Total liabilites and stockholders' equity }-\\ \left(\text{Bonds payable +}\text{Common stock + Retained earnings}\right)\end{array}\right)\\ =\$576,000-\left(\$144,000+\$303,000+\$48,000\right)\\ =\$81,000\end{array}$ (14)